Chapter 1: Business, Accounting, and You Short Exerciseslessons.pennfoster.com › pdf › SP1107.pdf · 2017-11-30 · (5-10 min.) S 1-5 Assets = Liabilities + Stockholder’s Equity

Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e

Chapter 1: Business, Accounting, and You

Short Exercises

(5-10 min.) S 1-2 Answer: d. Cost Principle (10-15 min.) S 1-3

1. e

2. f

3. d

4. g

5. b

6. c

7. a

(5-10 min.) S 1-4 a. $82,000 ($106,000 − $24,000)

b. $91,000 ($63,000 + $28,000)

c. $49,000 ($94,000 − $45,000)

Solutions Manual Copyright © 2015 Pearson Education, Inc.

(5-10 min.) S 1-5

Assets = Liabilities + Stockholder’s Equity Accounts Notes Stockholder’s

Cash + Equipment = payable + payable + equity

$13,000 + $35,000 = $9,000 + $5,000 + $34,000 Based on the accounting equation, Beach has $34,000 of equity in the business. Assets of $48,000

($13,000 + $35,000) − Liabilities of $14,000 ($9,000 + $5,000) = Stockholder’s equity of $34,000.

(5-10 min.) S 1-6

Assets = Liabilities + Stockholders’ Equity

Cash + Supplies = + Stockholders’ equity

$36,000 + $1,500 = $9,500 + $28,000 Based on the accounting equation, Boehms has $9,500 of liabilities. Assets of $37,500 ($36,000 +

$1,500) − Stockholders’ equity of $28,000 = Liabilities of $,500

(5-10 min.) S 1-7

Assets = Liabilities + Stockholders’ Equity Cash = Notes Payable + Common Stock

Investment + $15,000 = + $15,000 Borrowing + 18,000 = + $18,000 + ______

Bal. $33,000 = $18,000 + $15,000


(5-10 min.) S 1-8 Assets = Liabilities + Stockholders’ Equity

Cash + Accounts receivable

Accounts payable

Common stock + Retained Earnings

Service revenue

– Salary - Dividends

expense a. +$62,000 + 62,000

b. -$33,000 + $33,000

(5-10 min.) S 1-9 1. e

2. a

3. c

4. a

5. e

6. e

7. a

8. e

9. d

10. b

11. a


(5-10 min.) S 1-10

1. BS

2. BS

3. IS

4. IS

5. BS, RE

6. BS


(5-10 min.) S 1-11 1. d

2. e

3. b

4. a

5. c

(5-10 min.) S 1-12 1. Increased total assets (Cash)

2. No effect on total assets. The increase in Land offset the decrease in Cash.

3. Decreased total assets (Cash)

4. Increased total assets (Machinery and equipment)

5. Increased total assets (Accounts receivable)

6. Decreased total assets (Cash)

7. No effect on total assets. The increase in Cash offset the decrease in Accounts receivable.

8. No effect on total assets. The increase in Cash offset the decrease in Land.

9. Increased total assets (cash)

(5-10 min.) S 1-13 1. True

2. False ( Increase Supplies; decrease Cash)

3. True

4. True

5. True

6. False (Decrease Cash; decrease Accounts payable)

7. True

8. True

9. False (Decrease Cash; increase Expense/decrease Stockholders’ equity)


(5-10 min.) S 1-14 Req. 1 1. f. Sold stock to start the business.

2. e. Paid cash to purchase equipment.

3. g. Purchased equipment with a bank loan.

4. a. Earned revenue for services provided, but customer will pay later.

5. d. Paid cash for expenses incurred to operate the business.

6. c. Received cash for revenue earned by providing services.

7. b. Customers paid cash for services completed earlier in the month.

Req. 2 Revenues (transactions “4” and “6”)………………… $2,950 Less: Expenses (transaction “5”)………………..…… 1,350 Net income………………………………………..…. $1,600


Exercises (10-15 min.) E 1-23B Corner Grocery Corp. $45,000 + $27,900 = $72,900 Sampson Hardware, Inc. $104,000 - $44,000 = $60,000 Perfect Cleaners, Inc. $108,800 - $92,600 = $16,200 (10-15 min.) E 1-24B Req. 1 Total Total Total Assets − Stockholders’ Equity = Liabilities Beginning….. $84,000 − $56,000 = $28,000 Ending……… $153,000 − $91,000 = $62,000 Increase during the year = $ 34,000 Req. 2 Possible reasons for the increase in Liabilities may include:

Made purchases on account

Borrowed money on a note payable

(10-15 min.) E 1-25B Req. 1 Total Total Total Assets − Liabilities = Stockholders’ Equity Beginning….. $50,000 − $40,000 = $10,000 Ending……… $57,000 − $8,000 = $49,000 Increase during the year = $ 39,000


(10-15 min.) E 1-25B (cont) Req. 2 Possible reasons for the increase in Stockholders’ equity may include:

Sold stock

Earned net income

(15-20 min.) E 1-26B Oct. 31, 2014 Nov. 30, 2014

Total assets $127,000 $165,000

- Total liabilities $(92,000) $(119,000)

=

-

=

Stockholders’ equity

Common stock

Retained earnings

$35,000

(15,000)

$20,000

$46,000

(15,000)

$31,000

Assumption A: No dividends were paid. $31,000 ending balance = $20,000 Beg bal + Net income - Dividends

$31,000 = $20,000 + Net income - 0 $11,000 = Net income

Assumption B: $7,000 of dividends were paid. $31,000 ending balance = $20,000 Beg bal + Net income - Dividends

$31,000 = $20,000 + Net income – $7,000 $18,000 = Net income

Assumption C: $15,000 of dividends were paid. $31,000 ending balance = $20,000 Beg bal + Net income - Dividends

$31,000 = $20,000 + Net income - $15,000 $26,000 = Net income

(15-20 min.) E 1-27B


Assets = Liabilities + Stockholders’ Equity

Cash + Medical supplies + Land

Accounts payable


March Service revenue –

Rent expense

2 + 45,000 + 45,000 6 - 20,000 + 20,000

11 + 1,000 + 1,000 15 No entry required 17 + 11,000 + 11,000 19 - 1,700 + 1,700 22 + 350 - 350 30 -700 - 700

Bal. $33,950 + $650 + $20,000 = $300 + $45,000 + $11,000 – $1,700

(10-15 min.) E 1-28B Req. 1 The business is a corporation, as shown by the fact that it has a common stock account.

Req. 2

Julie’s Coffee Shop, Inc. Balance Sheet

October 31, 2014 ASSETS LIABILITIES

Cash $ 19,000 Accounts payable $800 Accounts receivable 1,400 Note payable 4,000 Supplies 750 Total liabilities 4,800 Office equipment 14,200 STOCKHOLDERS’ EQUITY Common stock 18,000 Retained earnings 12,550 Total Stockholders’ equity 30,550 Total liabilities and Total assets $35,350 stockholders’ equity $35,350 Req. 3


The balance sheet reports the financial position of a company at a given point in time and that

Assets = Liabilities + Stockholders’ Equity.

(15-20 min.) E 1-29B Req. 1

Account Type of Account Account Type of Account Office furniture Asset Rent expense Expense Utilities expense Expense Cash Asset Accounts payable Liability Office supplies Asset Notes payable Liability Salaries expense Expense Service revenue Revenue Salaries payable Liability Accounts receivable Asset Property tax expense Expense Supplies expense Expense Equipment Asset Req. 2

Alden Consulting, Inc. Income Statement

For the Year Ended December 31, 2014 Service Revenue $161,000 Expenses Salaries expense $43,000 Rent expense 18,000 Utilities expense 12,600 Supplies expense 3,400 Property tax expense 2,400 Total expenses 79,400 Net income $ 81,600 Results of operations for 2014: Net income of $81,600.


(15-20 min.) E 1-29B Cont.

Req 3

Alden Consulting, Inc. Statement of Retained Earnings

For the Year Ended December 31, 2014 Retained earnings, Jan. 1, 2014 $0 Add: Net income 81,600 Subtotal 81,600 Less: Dividends 60,000 Retained earnings, Dec. 31, 2014 $21,600 The dividends for the year were $60,000 ($0 + $81,600 - $21,600). (15-20 min.) E 1-30B Req 1 Hastings, Inc. Beginning: Assets $ 83,000 − Liabilities 36,000 = Stockholders’ Equity $ 47,000

Req 2 Ending:

Assets $ 162,000 − Liabilities 31,000 = Stockholders’ Equity $ 131,000

Req 3 Ending Stockholders’ equity $131,000

- Beginning Stockholders’ equity 47,000 = Change in Stockholders’ equity 84,000 - Sale of stock 20,000

= Change in retained earnings 64,000 + Dividends 71,000 = Net income $135,000

Note: The change in Retained earnings equals Net income minus Dividends. So, Dividends are added back to the change in Retained earnings to arrive at Net income.


Problems

(20-25 min.) P 1-36B Req. 1 Assets = Liabilities + Stockholders’ Equity

Cash + Accounts receivable + Supplies +

Office furniture

Accounts payable


June

Service revenue –

Rent expense – Dividends

3 *

5 + 70,000 + 70,000

Bal. $70,000 + $0 + $0 + $0 = $0 + $70,000 + $0 – $0 – $0

7 -1,300 + 1,300

Bal. $68,700 + $0 + $1,300 + $0 = $0 + $70,000 + $0 – $0 – $0

9 +3,500 +3,500

Bal. $68,700 + $0 + $1,300 + $3,500 = $3,500 + $70,000 + $0 – $0 – $0

10 *

14 **

20 +3,800 +3,800

Bal. $68,700 + $3,800 + $1,300 + $3,500 = $3,500 + $70,000 + $3,800 – $0 – $0

27 -2,400 +2,400

Bal. $66,300 + $3,800 + $1,300 + $3,500 = $3,500 + $70,000 + $3,800 – $2,400 – $0

30 -700 + 700

Bal. $65,600 + $3,800 + $1,300 + $3,500 = $3,500 + $70,000 + $3,800 – $2,400 – $700

* Represents a personal, not a business transaction ** Not a transaction as there was no financial impact


Req. 2 a. Total assets = $74,200 ($65,600+ $3,800 + $1,300 + $3,500) b. Total liabilities = $3,500 c. Total stockholder’s equity = $70,700 ($70,000 + $3,800 - $2,400 - $700) d. Net income for June = $1,400 ($3,800 − $2,400)


(25-30 min.) P 1-37B Req. 1 Assets = Liabilities + Stockholders’ Equity

Cash + Accounts receivable + Supplies + Equipment

Accounts payable


June

Service revenue –

Salaries expense – Dividends

Beg. bal. $1,680 + $4,130 + $0 + $32,000 = $3,100 + $30,000 + $9,170 – $4,460 – $0

a. +10,000 + 10,000 Bal. $11,680 + $4,130 + $0 + $32,000 = $3,100 + $40,000 + $9,170 – $14,460 – $0

b. -3,100 -3,100 Bal. $8,580 + $4,130 + $0 + $32,000 = $0 + $40,000 + $9,170 – $4,460 – $0

c. + 2,500 + 2,500 Bal. $11,080 + $4,130 + $0 + $32,000 = $0 + $40,000 + $11,670 – $4,460 – $0

d. +2,130 - 2,130 Bal. $13,210 + $2,000 + $0 + $32,000 = $0 + $40,000 + $11,670 – $4,460 – $0

e. + 850 + 850 Bal. $13,210 + $2,000 + $850 + $32,000 = $850 + $40,000 + $11,670 – $4,460 – $0

f. 6,200 + 6,200 Bal. $13,210 + $8,200 + $850 + $32,000 = $850 + $40,000 + $17,870 – $4,460 – $0

g. +7,000 +7,000 Bal. $20,210 + $8,200 + $850 + $32,000 = $850 + $47,000 + $17,870 – $4,460 – $0

h. - 4,600 + 4,600 Bal. $15,610 + $8,200 + $850 + $32,000 = $850 + $47,000 + $17,870 – $9,060 – $0

i. +250 - 250 Bal. $15,860 + $8,200 + $600 + $32,000 = $850 + $47,000 + $17,870 – $9,060 – $0

j. -1,500 +1,500

Bal. $14,360 + $8,200 + $600 + $32,000 = $850 + $47,000 + $17,870 – $9,060 – $1,500


(25-30 min.) P 1-37B (cont.) Req. 2

Interiors by Jill, Inc. Income Statement

Month Ended June 30, 2014 Revenues Service revenue $17,870 Expenses Salaries expense 9,060 Net income $8,810 Req. 3

Interiors by Jill, Inc. Statement of Retained Earnings

Month Ended June 30, 2014 Retained earnings, June 1, 2014 $0 Add: Net income 8,810 Subtotal 8,810 Less: Dividends 1,500 Retained earnings, June 30, 2014 $7,310 Req.4

Interiors by Jill, Inc. Balance Sheet June 30, 2014

ASSETS LIABILITIES Cash $ 14,360 Accounts payable $ 850Accounts receivable 8,200 Supplies 600 STOCKHOLDERS’ EQUITY Equipment 32,000 Common stock 47,000 Retained earnings 7,310 Total Stockholders’ equity 54,310 Total liabilities and Total assets $55,160 stockholder’s equity $55,160


(20-25 min.) P 1-38B a.

McKnight, Inc. Income Statement

Year Ended December 31, 2014 Service revenue $88,000 Expenses Salaries expense $13,000 Insurance expense 8,000 Advertising expense 5,500 Total expenses 26,500 Net Income $61,500 b.

McKnight, Inc. Statement of Retained Earnings Year Ended December 31, 2014

Retained earnings, December 31, 2013 $23,500 Add: Net income 61,500 Subtotal 85,000 Less: Dividends 40,000 Retained earnings, December 31, 2014 $45,000 c.

McKnight, Inc. Balance Sheet

December 31, 2014 ASSETS LIABILITIES

Cash $17,000 Accounts payable $ 9,000 Accounts receivable 8,000 Note payable 16,000 Equipment 65,000 Total liabilities 25,000 STOCKHOLDERS’ EQUITY Common stock 20,000 Retained earnings 45,000 Total stockholders’ equity 65,000 Total liabilities and Total assets $90,000 stockholders’ equity $90,000


(25-30 min.) P 1-39B Req. 1

Account Type of Account Account Type of Account Accounts payable Liability Interest expense Stockholders’ equity Accounts receivable Asset Land Asset Advertising expense Stockholders’ equity Note payable Liability Building Asset Property tax expense Stockholders’ equity Cash Asset Rent expense Stockholders’ equity Common stock Stockholders’ equity Salaries expense Stockholders’ equity Dividends Stockholders’ equity Salaries payable Liability Equipment Asset Service revenue Stockholders’ equity Insurance expense Stockholders’ equity Supplies Asset Req. 2

Alpha, Inc. Income Statement

Year Ended October 31, 2014 Service revenue $210,000 Expenses Salaries expense $91,300 Rent expense 24,000 Advertising expense 19,600 Interest expense 7,500 Property tax expense 4,900 Insurance expense 3,600 Total expenses 150,900 Net Income $ 59,100

Alpha, Inc. Statement of Retained Earnings Year Ended October 31, 2014

Retained earnings, October 31, 2013 $75,600 Add: Net income 59,100 Subtotal 134,700 Less: Dividends 28,000 Retained earnings, October 31, 2014 $106,700


(continued) P 1-39B Req. 3

Alpha, Inc. Balance Sheet

October 31, 2014 ASSETS LIABILITIES

Cash $24,800 Accounts payable $ 13,700 Accounts receivable 15,100 Salaries payable 4,750 Supplies 2,250 Note payable 75,000 Land 40,000 Total liabilities 93,450 Equipment 51,000 Building 142,000 STOCKHOLDERS’ EQUITY Common stock 75,000 Retained earnings 106,700 Total stockholders’ equity 181,700 Total liabilities and Total assets $275,150 stockholders’ equity $275,150 Req. 4 a. $59,100 (Net profit = net income). b. Increase of $31,100 ($59,100 Net income minus $28,000 Dividends).

c. $275,150 (Total economic resources = total assets). d. $ 93,450 (Total owed = total liabilities).


(20-25 min.) P 1-40B

On Call Realty, Inc. Balance Sheet

November 30, 2014 ASSETS LIABILITIES

Cash $31,000 Accounts payable $ 2,500 Accounts receivable 3,200 Salaries payable 1,100 Supplies 580 Notes payable 7,000 Equipment 8,100 Total liabilities 10,600 STOCKHOLDERS’ EQUITY Common stock 10,000 Retained earnings 22,280 Total stockholders’ equity 32,280 Total liabilities and Total assets $42,880 stockholders’ equity $42,880


Chapter 2: Analyzing and Recording Business Transactions

Short Exercises

(5-10 min.) S 2-2

1. Accounts payable L

2. Cash A

3. Service revenue R

4. Prepaid rent A

5. Rent expense E

6. Common stock SE


(5-10 min.) S 2-3

1. Transactions occur.

5. Prepare the financial statements

4. Prepare the trial balance.

3. Post the transactions from the journal to the ledger.

2. Record the transactions in the journal.

(5-10 min.) S 2-4

Example A, 1

1. R, 4

2. SE, 3

3. A, 1

4. E, 5

5. L, 2

6. SE, 3

7. E ,5


(5-10 min.) S 2-5

The basic summary device in accounting is the account. The left side of an account is called the

debit side, and the right side is called the credit side. We record transactions first in a journal.

Then we post or copy the data to the ledger (or T-accounts). It is helpful to list all the accounts

with their balances on a trial balance.

(5-10 min.) S 2-6

DR 1. Rent expense

CR 2. Accounts payable

CR 3. Service revenue

DR 4. Office furniture

CR 5. Common stock

DR 6. Land

DR 7. Dividends

(5-10 min.) S 2-7

Supplies Note payable 3/8 250 3/27 400 3/20 1,250 3/5 9,5003/17 800 3/31 4,500 Bal. 650 Bal. 3,750


(5-10 min.) S 2-8

Account Type

Office equipment Asset Dr. Cr.

Dividends Stockholder’s Equity

Dr. Cr.

Service revenue Revenue Cr. Dr.

Accounts payable Liability Cr. Dr.

Rent expense Expense Dr. Cr.

Cash Asset Dr. Cr.

(15-20 min.) S 2-9

Transaction Account Affected Type

Dr. or Cr.

(1) Cash Asset Increase Dr

Common stock Stockholders’ Equity Increase Cr

(2) Equipment Asset Increase Dr

Cash Asset Decrease Cr

(3) Supplies Asset Increase Dr

Accounts payable Liability Increase Cr

(4) Accounts receivable Asset Increase Dr

Service revenue Revenue Increase Cr

(5) Accounts payable Liability Decrease Dr



(6) Operating expenses Expense Increase Dr


(7) Dividends Stockholders’ Equity Increase Dr


(10-15 min.) S 2-10

Journal

DATE ACCOUNTS POST. REF. Dr. Cr.

Aug 1 Cash 50,000 Common stock 50,000 Sold stock. 5 Dental supplies 6,300 Accounts payable 6,300 Purchased supplies on account. 7 Rent Expense 1,000 Cash 1,000 Paid office rent. 10 Cash 1,200 Accounts receivable 2,600 Service revenue 3,800 Performed service for patients.


(10-15 min.) S 2-11

Journal

DATE ACCOUNTS POST.REF. Dr. Cr.

Sep 3 Cash 35,000 Note payable 35,000 Borrowed money from the bank. 9 Accounts receivable 1,250 Service revenue 1,250 Performed service on account. 16 Cash 500 Accounts receivable 500 Received cash on account. 22 Utilities expense 380 Accounts payable 380 Received utility bill. 2,250 30 Salaries expense 2,600 Cash 2,250 Paid salary expense. 30 Interest expense 170 Cash 170 Paid interest expense.


(10-15 min.) S 2-12

Audio Masters, Corp Trial Balance April 30, 2014

BALANCE

ACCOUNT TITLE DEBIT CREDIT Cash $18,300 Prepaid rent 750 Equipment 21,000 Accounts payable $ 1,700Note payable 11,500Common stock 15,000Dividends 22,600 Service revenue 63,000Rent expense 10,150 Utilities expense 18,400

Total $91,200 $91,200


(5-10 min.) S 2-13

Mylar, Inc. Trial Balance December 31, 2014

ACCOUNT DEBIT CREDIT BS BS BS BS BS BS BS RE IS IS IS IS

Cash Accounts Receivable Supplies Equipment Accounts Payable Notes Payable Common Stock Dividends Service Revenue Salaries Expense Rent Expense Utilities Expense Total

$12,1001,900

2506,000

700

1,740800340

$23,830

$1,830 10,000 8,500

3,500

_______ $23,830

(5-10 min.) S 2-14

e 1 Posting

d 2 Normal balance

g 3 Payable

a 4 Journal

b 5 Receivable

h 6 Chart of accounts

c 7 Debit

f 8 Trial balance

i 9 Credit


Exercises

(10-15 min.) E 2-23B

Transaction Account Affected Type

Dr. or Cr.

Apr. 1 Advertising expense Stockholders’ Equity Increase Dr


3 Equipment Asset Increase Dr


5 Cash Asset Increase Dr

Common stock Stockholders’ Equity Increase Cr

9 Cash Asset Increase Dr

Notes payable Liability Increase Cr

12 Utilities expense Stockholders’ Equity Increase Dr


17 Supplies Asset Increase Dr



(15-20 min.) E 2-24B

Journal


Apr. 1 Interest expense 1,000 Cash 1,000 5 Office furniture 3,000 Accounts payable 3,000 10 Accounts receivable 2,400 Service revenue 2,400 12 Cash 20,000 Notes payable 20,000 19 Cash 75,000 Land 75,000 21 Building 300,000 Notes payable 300,000 27 Accounts Payable 1,500 Cash 1,500


(15-20 min.) E 2-25B

Journal


Dec. 1 Cash 80,000 Common stock 80,000 3 Supplies 160 Accounts payable 160 5 Building 45,000 Cash 45,000 6 Cash 3,700 Service revenue 3,700 11 Accounts payable 120 Cash 120 18 Accounts receivable 2,650 Service revenue 2,650 24 Cash 2,100 Accounts receivable 2,100 31 Salaries expense 1,100 Rent expense 1,450 Cash 2,550


(10-15 min.) E 2-26B

Req. 1

Cash Accounts Payable May 1 35,000 May. 4 12,700 May 9 600 May 2 900

6 3,000 9 600 Bal. 30023 750 29 1,500

Bal. 23,950

Accounts Receivable Common stock May 17 5,100 May 23 750 May 1 35,000Bal. 4,350 Bal. 35,000

Supplies Service revenue May 2 900 May 6 3,000Bal. 900 17 5,100 Bal. 8,100

Equipment Salaries Expense May 4 12,700 May 29 1,500 Bal. 12,700 Bal. 1,500


Req. 2

Fun Time Daycare, Inc. Trial Balance May 31, 2014

BALANCE

ACCOUNT TITLE DEBIT CREDIT Cash $23,950 Accounts receivable 4,350 Supplies 900 Equipment 12,700 Accounts payable $ 300Common stock 35,000Service revenue 8,100Salaries expense 1,500 Total $43,400 $43,400


(15-20 min.) E 2-27B

Req 1

Journal


Dec 2 Rent expense 1,600 Cash 1,600 4 Cash 900 Service revenue 900 8 Supplies 225 Accounts payable 225 11 Cash 1,500 Accounts receivable 1,500 15 Cash 5,000 Common stock 5,000 19 Accounts payable 375 Cash 375 27 Accounts receivable 1,640 Service revenue 1,640 28 Notes payable 2,500 Cash 2,500

Req 2 & 3

Cash Accounts payable Dec 1 4,325 Dec 2 1,600 Dec 19 375 Dec 1 875Dec 4 900 Dec 19 375 Dec 8 225Dec 11 1,500 Dec 28 2,500 Bal. 725Dec 15 5,000 Bal. 7,250


Accounts receivable Notes payable Dec 1 2,200 Dec 11 1,500 Dec 28 2,500 Dec 1 17,500Dec 27 1,640 Bal. 2,340 Bal. 15,000

Supplies Common stock Dec 1 450 Dec 1 30,000Dec 8 225 Dec 15 5,000Bal. 675 Bal. 35,000

Office furniture Service revenue Dec 1 3,100 Dec 1 5,300Bal. 3,100 Dec 4 900 Dec 27 1,640 Bal. 7,840

Building Rent expense Dec 1 42,000 Dec 1 1,600 Bal. 42,000 Dec 2 1,600 Bal. 3,200


Req 4

Going Green, Inc. Trial Balance

December 31, 2014 ACCOUNT TITLE DEBIT CREDIT

Cash $ 7,250 Accounts receivable 2,340 Supplies 675 Office furniture 3,100 Building 42,000 Accounts payable $ 725Notes payable 15,000Common stock 35,000Service revenue 7,840Rent expense 3,200 Total $58,565 $58,565


(20-25 min.) E 2-28B

Req. 1

Journal


Jun 1 Cash 28,000 Common stock 28,000 Sold stock. 2 Supplies 1,100 Accounts Payable 1,100 Purchased supplies on acct. 3 Building 50,000 Notes payable 50,000 Purchased building signing note payable. 4 Equipment 9,000 Cash 9,000 Paid cash to purchase equipment 5 Notes Payable 2,500 Cash 2,500 Made payment on note payable. 6 Accounts payable 500 Cash 500 Made payment on account.

Req. 2

Cash Accounts payable (1) 28,000 (4) 9,000 (6) 500 (2) 1,100

(5) 2,500 Bal. 600 (6) 500

Bal. 16,000

Supplies Notes payable


(2) 1,100 (5) 2,500 (3) 50,000Bal. 1,100 Bal. 47,500

Equipment Common stock (4) 9,000 (1) 28,000

Bal. 9,000 Bal. 28,000

Building (3) 50,000

Bal. 50,000

Req. 3

Grinko, Inc. Trial Balance June 30, 2014

BALANCE

ACCOUNT TITLE DEBIT CREDIT Cash $16,000 Supplies 1,100 Equipment 9,000 Building 50,000 Accounts payable $ 600Notes payable 47,500Common stock 28,000Total $76,100 $76,100


Req. 4

Grinko, Inc. Balance Sheet June 30, 2014

ASSETS LIABILITIES Cash $ 16,000 Accounts payable $ 600Supplies 1,100 Notes payable 47,500Equipment 9,000 Total liabilities 48,100Building 50,000 STOCKHOLDERS’ EQUITY Common stock 28,000 Total liabilities and Total assets $76,100 stockholder’s equity $76,100


(25-30 min.) E 2-29B

Req. 1

Journal


Sep 2 Cash 50,000 Common stock 50,000 3 Rent expense 1,750 Cash 1,750 6 Equipment 1,400 Cash 1,400 8 Furniture 2,700 Accounts payable 2,700 11 Supplies 225 Accounts payable 225 19 Accounts receivable 1,835 Service revenue 1,835 20 Utility expense 285 Cash 285 28 Cash 975 Service revenue 975 Req. 2

Cash Accounts payable Sep 2 50,000 Sep 3 1,750 Sep 8 2,700

28 975 6 1,400 11 225 20 285 Bal 2,925

Bal. 47,540


Accounts receivable Common stock Sep 19 1,835 Sep 2 50,000

Bal. 50,000Bal. 1,335

Supplies Service revenue Sep 11 225 Sep 19 1,835

Bal. 225 28 975 Bal. 2,810

Equipment Rent Expense Sep 6 1,400 Sep 3 1,750 Bal. 1,400 Bal. 1,750

Furniture Utilities expense Sep 8 2,700 Sep 20 285 Bal. 2,700 Bal. 285

Req. 3

Nolan Consulting, Inc. Trial Balance

September 30, 2014

BALANCE

ACCOUNT TITLE DEBIT CREDIT Cash $ 47,540 Accounts receivable 1,835 Supplies 225 Equipment 1,400 Furniture 2,700 Accounts payable $ 2,925Common stock 50,000Service revenue 2,810Rent expense 1,750 Utilities expense 285 Total $55,735 $55,735


Req. 4

Nolan Consulting, Inc. Income Statement

Month Ended September 30, 2014

Service revenue $2,810Expenses: Rent expense $1,750 Utilities expense 285 Total expenses 2,035 Net Income $775

Nolan Consulting, Inc. Statement of Retained Earnings

Month Ended September 30, 2014

Retained earnings, September 1, 2014 $0Add: Net income 775Retained earnings, September 30, 2014 $775

Note: There were no dividends during the month of September

Nolan Consulting, Inc. Balance Sheet

September 30, 2014

ASSETS LIABILITIES Cash $ 47,540 Accounts payable $ 2,925Accounts receivable 1,835 Supplies 225 STOCKHOLDERS’ EQUITY Equipment 1,400 Common stock 50,000Furniture 2,700 Retained earnings 775 Total Stockholders’ equity 50,775 Total liabilities and Total assets $53,700 stockholder’s equity $53,700


(10-15 min.) E 2-30B

Effect on Trial Balance Account(s) Misstated

a. Total debits = Total credits Cash

$810 too high

Rent expense

$810 too low

b. Total debits = Total credits Accounts receivable

$700 too high

Accounts Payable

$700 too high

c. Total debits = Total credits Cash

$90 too low

Service revenue

$90 too low

d. Total debits = Total credits Supplies

$380 too low

Accounts payable

$380 too low

e. Total debits > Total credits Notes payable

$95,000 too low


Problems

(15-20 min.) P 2-37B

Journal


Sep 1 Cash 60,000 Common stock 60,000 3 Supplies 450 Cash 450 8 Land 43,000 Cash 43,000 12 Office equipment 4,300 Accounts payable 4,300 17 Cash 65,000 Notes payable 65,000 26 Accounts payable 2,800 Cash 2,800 30 Cash 12,000 Accounts receivable 16,500 Service revenue 28,500 30 Salaries expense 3,240 Rent expense 1,800 Utilities expense 675 Cash 5,715 30 Dividends 4,300 Cash 4,300


(15-20 min.) P 2-38B

Journal


May 1 Cash 150,000 Notes payable 150,000 3 Building 135,000 Cash 135,000 6 Accounts receivable 11,800 Service revenue 11,800 9 Supplies 1,100 Accounts payable 1,100 13 Cash 8,100 Service revenue 8,100 15 Dividends 5,000 Cash 5,000 17 Cash 7,500

Accounts Receivable 7,500 18 Property tax expense 1,250 Cash 1,250 22 Salaries expense 3,350 Cash 3,350 26 Supplies 1,300 Cash 1,300 31 Accounts payable 5,000 Cash 5,000


(20-25 min.) P2-39B

Req. 2

Journal


July 1 Cash 100,000 Common stock 100,000 3 Supplies 575 Furniture 2,300 Accounts payable 2,875 5 Cash 1,600 Service revenue 1,600 8 Land 28,000 Cash 28,000 11 Accounts receivable 1,850 Service revenue 1,850 14 Salaries expense 575 Cash 575

16 Accounts payable 2,300 Cash 2,300 19 Cash 2,450 Service revenue 2,450 23 Accounts receivable 3,300 Service revenue 3,300 28 Cash 1,450 Accounts receivable 1,450 31 Salaries expense 575 Cash 575 31 Rent expense 1,720 Cash 1,720 31 Dividends 2,500 Cash 2,500


Req. 1, 3, and 4

Cash Accounts Payable Jul 1 100,000 Jul 8 28,000 Jul 16 2,300 Jul 3 2,875

5 1,600 14 575 Bal 57519 2,450 16 2,300 28 1,450 31 575

31 1,720 Common stock 31 2,500 Jul 1 100,000Bal. 69,830 Bal. 100,000

Accounts Receivable Dividends Jul 11 1,850 Jul 28 1,450 Jul 31 2,500 23 3,300 Bal. 2,500 Bal. 3,700

Supplies Service revenue Jul 3 575 Jul 5 1,600Bal. 575 11 1,850 19 2,450 23 3,3009,200 Bal. 8,400

Furniture Salaries Expense Jul 3 2,300 Jul 14 575 Bal. 2,300 31 575 Bal. 1,150

Land Rent Expense Jul 8 28,000 Jul 31 1,720 Bal. 28,000 Bal. 1,720


Req. 5

Slater & Associates, Inc. Trial Balance July 31, 2014

BALANCE

ACCOUNT TITLE DEBIT CREDIT Cash $ 69,830 Accounts receivable 3,700 Supplies 575 Furniture 2,300 Land 28,000 Accounts payable $ 575Common stock 100,000Dividends 2,500 Service revenue 9,200Salaries expense 1,150 Rent expense 1,720 Total $109,775 $109,775


(25-30 min.) P 2-40B

Req. 1

Journal Page 6


Jan 16 Cash 110 3,400 Accounts receivable 112 3,400 Received payment on account. 18 Accounts receivable 112 1,200 Service revenue 411 1,200 Performed service on account. 21 Cash 110 2,700 Service revenue 411 2,700 Performed service for cash. 23 Supplies 115 400 Accounts Payable 210 400 Purchased supplies on account. 25 Dividends 315 1,400 Cash 110 1,400 Paid dividends. 27 Accounts payable 210 2,100 Cash 110 2,100 Made payment on account. 29 Cash 110 3,800 Service revenue 411 3,800 Received cash for services performed. 30 Rent Expense 515 1,000 Cash 110 1,000 Paid rent. 30 Salaries Expense 511 2,400 Cash 110 2,400 Paid employee salaries.


Req. 2

CASH ACCOUNT NO. 110 POST. BALANCE

DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT

Jan 15 Bal. √ 2,700 16 J.6 3,400 6,100 21 J.6 2,700 8,800 25 J.6 1,400 7,400 27 J.6 2,100 5,300 29 J.6 3,800 9,100 30 J.6 1,000 8,100 30 J.6 2,400 5,700

ACCOUNTS RECEIVABLE ACCOUNT NO. 112 POST. BALANCE


Jan 15 Bal. √ 8,000 16 J.6 3,400 4,600 18 J.6 1,200 5,800

SUPPLIES ACCOUNT NO. 115 POST. BALANCE


Jan 15 Bal. √ 1,000

23 J.6 400 1,400

EQUIPMENT ACCOUNT NO. 140 POST. BALANCE


Jan 15 Bal. √ 14,600


ACCOUNTS PAYABLE ACCOUNT NO. 210 POST. BALANCE


Jan 15 Bal. √ 4,500 23 J.6 400 4,900 27 J.6 2,100 2,800

COMMON STOCK ACCOUNT NO. 311 POST. BALANCE


Jan 15 Bal. √ 21,600

DIVIDENDS ACCOUNT NO. 315 POST. BALANCE


Jan 15 Bal. √ 2,800 25 J.6 1,400 4,200

SERVICE REVENUE ACCOUNT NO. 411 POST. BALANCE


Jan 15 Bal. √ 6,600 18 J.6 1,200 7,800 21 J.6 2,700 10,500 29 J.6 3,800 14,300


SALARIES EXPENSE ACCOUNT NO. 511 POST. BALANCE


Jan 15 Bal. √ 2,300 30 J.6 2,400 4,700

RENT EXPENSE ACCOUNT NO. 515 POST. BALANCE


Jan 15 Bal. √ 1,300 30 J.6 1,000 2,300


Req. 3

XYZ Systems, Inc. Trial Balance

January 31, 2014

ACCOUNT DEBIT CREDIT Cash $ 5,700 Accounts receivable 5,800 Supplies

1,400 Equipment 14,600 Accounts payable $ 2,800 Common stock 21,600 Dividends 4,200 Service revenue 14,300 Salaries expense 4,700 Rent expense 2,300 Total $38,700 $38,700


(20-25 min.) P 2-41B

Req. 1

BakerConsulting, Inc. Trial Balance

December 31, 2014

BALANCE

ACCOUNT DEBIT CREDIT Cash 9,120 Accounts receivable 7,370 Supplies 650 Building 135,000 Land 82,000 Accounts payable $ 4,100Notes payable 85,000Common stock 120,000Retained earnings 12,320Dividends 15,000 Service revenue 101,700Salaries expense 48,750 Rent expense 11,340 Utilities expense 6,750 Supplies expense 1,840 Insurance expense 5,300 Total $323,120 $323,120


Req. 2

Baker Consulting, Inc. Income Statement

Year Ended December 31, 2014 Service revenue $101,700Expenses Salaries expense $48,750 Rent expense 11,340 Utilities expense 6,750 Insurance expense 5,300 Supplies expense 1,840 Total expenses 73,980 Net Income $27,720

Baker Consulting , Inc. Statement of Retained Earnings

Year Ended December 31, 2014

Retained earnings, January 1, 2014 $12,320Add: Net income 27,720 Subtotal 40,040Less: Dividends 15,000Retained earnings, December 31, 2014 $25,040


BakerConsulting, Inc. Balance Sheet

December 31, 2014

ASSETS LIABILITIES Cash $ 9,120 Accounts payable $ 4,100Accounts receivable 7,370 Note payable 85,000Supplies 650 Total liabilities 89,100Land 82,000 STOCKHOLDERS’ EQUITY Building 135,000 Common stock 120,000 Retained earnings 25,040 Total stockholders’ equity 145,040 Total liabilities and Total assets $234,140 stockholders’ equity $234,140

Req 3

It was a profitable year for Baker Consulting, Inc. from the standpoint that the business generated $27,720 of Net income.


(15-20 min.) P 2-42B

Req. 1

Journal Page 3


a. Cash 270 Service revenue 270 ($740 – $470 = $270) b. Supplies 450 Accounts payable 450 The original entry was recorded “backwards”

so an entry for double the amount needs to be made

c. Cash 10,800 Rent expense 10,800 ($12,000 - $1,200 = $10,800)

d. Accounts payable 825 Accounts receivable 825

Req 2

a. Net income is understated because Service revenue was credited (increased) by only $470 instead of the correct amount of $740.

b. Net income would be unchanged because the entry did not effect a revenue or an expense.

c. Net income would be understated because Rent expense was debited (increased) by $12,000 instead of the correct amount of $1,200.

d. Net income would be unchanged because the entry did not effect a revenue or an expense.


Chapter 3: Adjusting and Closing Entries

Short Exercises

(5-10 min.) S 3-2

1. d

2. c

3. b

4. f

5. a

6. e

7. g


(5-10 min.) S 3-3

Type of Adjusting Entry Related Income Statement Account

a. Accrued expense Interest expense

b. Deferred revenue Service revenue

c. Accrued revenue Service revenue

d. Deferred expense Supplies expense

e. Deferred expense Depreciation expense

(5-10 min.) S 3-4

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

July 31 Rent expense ($4,500 X 1/6)

750

Prepaid rent 750

Record rent expense for July.

Prepaid rent Rent expense Bal. 4,500 July 31 750 July 31 750 Bal. 3,750


(5-10 min.) S 3-5

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Oct 31 Supplies expense ($1,200 − $480)

720

Office supplies 720

Record supplies expense for October

Office supplies Supplies expense Bal. 1,200 Oct. 31 720 Oct. 31 720 Bal. 480

(5-10 min.) S 3-6

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Dec. 31 Interest expense ($140 × 5 months)

700

Interest payable 700

Accrue interest expense for

August – December.

Interest payable Interest expense

Dec. 31 700 Dec. 31 700


(5-10 min.) S 3-7

Journal

DATE ACCOUNTS

POST.

REF. Dr. Cr.

Dec. 31 Unearned subscription revenue

($2,700/12× 7 months)

1,575

Subscription revenue 1,575

Record subscription revenue

Earned for June – December.

Unearned subscription revenue Subscription revenue

Dec. 31 1,575 Jun. 1 2,700 Dec. 31 1,575

Bal. 1,125 Bal 1,575


(5-10 min.) S 3-8

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

1. Aug. 31 Accounts receivable

2,700

Service revenue 2,700

Accrue service revenue.

2. Salaries expense 3,200

Salaries payable 3,200

Accrue salary.

3. Interest expense 260

Interest payable 260

Accrue interest.

(5-10 min.) S 3-9

You would record $915 of service revenue at the end of July. Under the accrual basis of accounting, revenues are recorded when earned regardless of when cash is received. Therefore, both the $750 you have received as well as the $165 that is still owed to you would be recorded as service revenue.


(5-10 min.) S 3-10

Account Type of Account Permanent/Temporary Closed

Depreciation expense Expense Temporary Yes

Sales revenue Revenue Temporary Yes

Building Asset Permanent No

Cash Asset Permanent No

Unearned service

revenue

Liability Permanent No

Prepaid rent Asset Permanent No

Dividends Stockholders’

equity

Temporary Yes


(10-15 min.) S 3-11

Req 1

Net income = $575 ($1,800 service revenue - $1,225 total expenses)

Req 2

Change in Retained earnings = $275 ($575 net income - $300 dividends)

Req 3

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

July 31 Service revenue

1,800

Retained earnings 1,800

Close revenue account


Rent expense 650

Salaries expense 575

Close expense accounts

Retained earnings 300

Dividends 300

Close dividends


(5-10 min.) S 3-12

Type of

Entry (ADJ or CL)

Accounts

Post. Ref.

Dr.

Cr.

ADJ Salaries expense 725 Salaries payable 725

CL Service revenue 4,200 Retained earnings 4,200 CL Retained earnings 1,500 Dividends 1,500 ADJ Unearned revenue 940 Service revenue 940

(5-10 min.) S 3-13

Anderson Realty, Inc. Post-Closing Trial Balance July 31, 2014

ACCOUNT DEBIT CREDIT Cash Accounts receivable Prepaid insurance Prepaid rent Equipment Accumulated deprecition – Equipment Accounts payable Notes payable Common Stock Retained earnings Total

$3,800 2,300 4,200 1,600

45,500

________ $57,400

4,6002,1005,000

35,00010,700

$57,400


Exercises

(10-15 min.) E 3-28B

Req 1

The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue.

Req 2

Journal

DATE ACCOUNTS POST REF. Dr.

Cr.

Cash 170 Unearned service revenue 170 Collect revenue in advance. Accounts receivable 375 Service revenue 375 Accrue service revenue. Cash 80 Service revenue 80 Collect cash for services performed


(5-10 min.) E 3-29B

Missing amounts are in italics. A B C D Beginning prepaid insurance $ 400 600 $ 1,100 $ 800 Payments for Prepaid insurance during the year 1,500 $1,000 2,200 900 Total amount to account for 1,900 1,600 3,300 1,700 Ending Prepaid insurance 700 400 300 1,200 Insurance expense $1,200 $ 1,200 $ 3,000 $ 500

Journal

DATE ACCOUNTS POSTREF. Dr. Cr.

A. Insurance expense 1,200 Prepaid insurance 1,200 Record insurance expense.


(10-15 min.) E 3-30B

Journal


a. Salaries expense 4,500 Salaries payable 4,500 b. Unearned service revenue 1,250 Service revenue 1,250 c. Depreciation expense 1,900 Accumulated depreciation 1,900

d. Rent expense 350

Prepaid rent 350 e. Interest receivable 980 Interest revenue 980


(10-15 min.) E 3-31B

Net Income:

Transaction Overstated/Understated Amount a. Overstated $1,400 b. Overstated $2,600 c. Overstated $3,750 d. Overstated $450 e. Understated $2,200

(15-20 min.) E 3-32B

Journal

DATE ACCOUNTS POST REF. Dr. Cr.

a. Unearned rent revenue ($6,600 × 2/6) 2,200 Rent revenue 2,200 Record revenue earned. b. Interest receivable 520 Interest revenue 520 Accrue interest revenue. c. Salaries expense ($3,100 × 4 days) 12,400 Salaries payable 12,400 Accrue salary expense. d. Supplies expense 300 Supplies ($1,000− $700) 300 Record supplies expense. e. Depreciation Expense ($4,000 / 5 years) 800 Accumulated Depreciation 800 Record depreciation expense. f. Insurance expense 390 Prepaid insurance ($936 × 5/12) 390 Record insurance expense.


(15-20 min.) E 3-33B

Journal


a. Accounts receivable 1,650 Service revenue 1,650 Accrue revenue. b. Unearned service sevenue 350 Service revenue 350 Record revenue earned. c. Supplies expense ($900 − $240) 660 Supplies 660 Record supply expense. d. Salaries expense 980 Salaries payable 980 Accrue salary expense.


(continued) E 3-33B

Accounts receivable Supplies Bal. 2,100 Bal. 900 (c) 660(a) 1,650 Bal. 240 Bal. 3,750

Salaries payable Unearned service revenue (d) 980 (b) 350 Bal. 750 Bal. 980 Bal. 400

Service revenue Salaries expense Bal. 4,100 Bal. 1,850 (a) 1,650 (d) 980 (b) 350 Bal. 2,830 Bal. 6,100

Supplies expense (c) 660 Bal. 660


(15-20 min.) E 3-34B Req. 1

a. To record supplies used b. To record depreciation expense on equipment c. To record depreciation expense on the building d. To record accrued salaries e. To record accrued revenues

Req. 2

Accounts receivable Supplies 29,300 3,000 (a) 600(e) 1,200 Bal. 2,400 Bal 30,500

Accumulated depreciation, equipment Accumulated depreciation, building

5,200 46,000 (b) 1,800 (c) 6,000 Bal 7,000 Bal 52,000

Depreciation expense, equipment Depreciation expense, building

(b) 1,800 (c) 6,000 Bal 1,800 Bal 6,000

Salaries expense Supplies expense

14,000 (a) 600 (d) 1,700 Bal 600

Bal 15,700

Service revenue 38,000 (e) 1,200 Bal. 39,200

Salaries payable (d) 1,700 Bal 1,700


Cyclone Construction, Inc. Income Statement

Year Ended July 31, 2014

Revenues Service revenue $39,200Expenses Salaries expense $15,700 Depreciation expense, building 6,000 Depreciation expense, equipment 1,800 Supplies expense 600 Total expenses 24,100Net Income $ 15,100

Req. 3 Operations were successful from the standpoint that the business earned net income of $15,100

during the year. The reason is revenues were greater than expenses.


(10-15 min.) E 3-35B Req. 1

Williams Industrial, Inc. Statement of Retained Earnings Year Ended December 31, 2014

Retained earnings, January 1, 2014 $ 19,600 Less: Net loss (2,700) Subtotal 16,900 Less: Dividends ($800 × 12 months) (9,600) Retained earnings, December 31, 2014 $ 7,300 Req. 2 Retained earnings had a net decrease of $12,300 for the year (End $7,300 – Beg $19,600). This

resulted from the current net loss ($2,700) and dividends paid ($9,600).

(10-15 min.) E 3-36B

Supplies Bal. 4,000 Purchase of supplies 6,500 Supplies expense 9,000Bal. 1,500

Salaries payable Bal. 1,700Cash payment 59,800 Salary expense 62,500 Bal. 4,400

Unearned service revenue Bal. 17,000Service revenue 73,500 Cash receipts 66,400 Bal. 9,900


(15-20 min.) E 3-37B

Five Star Catering, Inc. Income Statement Month Ended October 31, 2014

Revenue: Service revenue Expenses: Salaries expense Rent expense Depreciation expense, equipment Supplies expense Total Expenses Net Income

$4,750 1,200

675 450

$20,400

7,075$13,325

Five Star Catering, Inc. Statement of Retained Earnings Month Ended October 31, 2014

Retained earnings, October 1, 2014 Add: Net income for the Month Subtotal Less: Dividends Retained earnings, October 31, 2014

$15,925 13,325 29,250 2,500 $26,750


Five Star Catering, Inc. Balance Sheet

October 31, 2014 Assets Liabilities

Cash Accounts receivable Supplies Equipment Less: Accum. depreciation Total Assets

$32,000(8,400)

$9,1003,800

600

23,600

$37,100

Accounts payable Salaries payable Unearned service revenue Total liabilities

Stockholders’ Equity Common stock Retained earnings Total stockholders’ equity Total Liabilities & Stockholders’ equity

$2,1001,3501,9005,350

5,00026,75031,750

$37,100


(10-15 min.) E 3-38B

Journal


Apr 30 Service revenue 54,000 Interest revenue 500 Retained earnings 54,500 Close revenue accounts Retained earnings 33,500 Salaries expense 20,800 Rent expense 5,900 Depreciation expense 2,600 Interest expense 2,400 Supplies expense 1,800 Close expense accounts Retained earnings 16,000 Dividends 16,000 Close dividends

Jona & Son Electrical, Inc.’s ending retained earnings is $9,200($4,200 + $54,500- $33,500 - $16,000).


(10-15 min.) E 3-39B

Christianson & Associates, Inc. Statement of Retained Earnings Year Ended July 31, 2014

Retained earnings, August 1, 2013 Add: Net Income Subtotal Less: Dividends Retained earnings, July 31, 2014

$84,000 78,000

162,000 46,000

$116,000

(10-15 min.) E 3-40B

Photo Finish, Inc. Post-Closing Trial Balance

July 31, 2014 ACCOUNT DEBIT CREDIT Cash Accounts receivable Supplies Equipment Accumulated depreciation, equipment Accounts payable Salaries payable Unearned service revenue Common stock Retained earnings Total

$10,25013,2001,700

23,000

.

$48,150

$5,000 5,200 4,700 3,000

15,000 15,250

$48,150


(10-15 min.) E 3-41B

Journal


Jan 31 Service revenue 96,400 Retained earnings 96,400 Close revenue account Retained earnings 50,460 Salaries expense 32,600 Rent expense 14,800 Depreciation expense, equipment 1,550 Depreciation expense, furniture 730 Supplies expense 480 Close expense accounts Retained earnings 20,000 Dividends 20,000 Close dividends


Problems

(15-20 min.) P 3-48B

Journal


a. Dec. 31 Insurance expense ($1,200× 8/12 months) 800 Prepaid insurance 800 Record insurance expense.

b. 31 Salaries expense ($12,500 × 1/5) 2,500 Salaries payable 2,500 Accrue salary expense.

c. 31 Interest receivable 640 Interest revenue 640 Accrue interest revenue.

d. 31 Supplies expense ($1,025 + $4,300 − $2,500) 2,825 Supplies 2,825 Record supply expense.

e. 31 Unearned service revenue 4,700 Service revenue 4,700 Record revenue earned.

f. 31 Depreciation expense, vehicles 2,550 Accumulated depreciation, vehicles 2,550 Depreciation expense, equipment 1,300 Accumulated depreciation, equipment 1,300 Record depreciation expense.


(15-20 min.) P 3-49B

Journal

DATE ACCOUNTS

POST REF. Dr. Cr.

Nov 30 Supplies expense ($1,125 - $0) 1,125 Supplies ($1,950− $825) 1,125 Record supplies used. 30 Rent expense ($3,200 - $2,200) 1,000 Prepaid rent ($3,800 - $2,800) 1,000 Record Prepaid rent expired 30 Depreciation expense, equipment ($4,130-

$2,480) 1,650

Accumulated depreciation, equipment ($6,750 − $5,100) 1,650 Record depreciation. 30 Salaries expense ($23,775 - $22,600) 1,175 Salaries payable ($1,175 − $0) 1,175 Accrue salary expense. 30 Interest expense ($420 - $275) 145 Interest payable ($145 - $0) 145 Accrue interest expense 30 Unearned service revenue ($2,900 - $1,300) 1,600 Service revenue ($47,750 - $46,150) 1,600 Record unearned revenue earned.


(25-30 min.) P 3-50B

Req 1& 2

Journal

DATE ACCOUNTS

POST REF. Dr. Cr.

a. Jun 30 Insurance expense 1,900 Prepaid insurance ($2,300 - $400) 1,900 Record prepaid insurance expired b. 30 Supplies expense 800 Supplies 800 Record supplies used. c. 30 Depreciation expense, equipment 2,500 Accumulated depreciation, equipment 2,500 Record depreciation. d. 30 Utilities expense 900 Accounts payable 900 Accrue utilities expense e. 30 Salaries expense 800 Salaries payable 800 Accrue salary expense. f. 30 Unearned service revenue ($2,500 - $1,200) 1,300 Service revenue 1,300 Record unearned revenue earned


Req 1 & 2

Cash

Supplies

Accounts payable Bal 22,800 Bal 1,700 800 b. 2,000 Bal 900 d.

Bal 900 2,900 BalBal 22,800 Equipment Salaries payable

Accounts receivable Bal 85,000 800 e.Bal 19,700

Bal 85,000 800 BalBal 19,700 Accumulated depreciation,

equipment Unearned service

revenue 24,000 Bal f. 1,300 2,500 Bal

Prepaid insurance 2,500 c.

Bal 2,300 1,900 a. 26,500 Bal 1,200 Bal

Bal 400

Common stock

Service revenue

70,000 Bal 11,000 Bal 1,300 f. 70,000 Bal 12,300 Bal Retained

earnings

Salaries

expense

33,500 Bal Bal 3,400 e. 800 33,500 Bal Bal 4,200

Dividends

Insurance

expense

Bal 8,100 a. 1,900 Bal 8,100 Bal 1,900


Depreciation expense, equipment

c. 2,500

Bal 2,500 Utilities

expense

d. 900

Bal 900 Supplies

expense

b. 800

Bal 800


Req 3

Novelty Nook, Inc., Adjusted Trial Balance

June 30, 2014 ACCOUNT TITLE Dr. Cr.

Cash $22,800 Accounts receivable 19,700 Prepaid insurance 400 Supplies 900 Equipment 85,000 Accumulated depreciation, equipment $26,500 Accounts payable 2,900 Salaries payable 800 Unearned service revenue 1,200 Common stock 70,000 Retained earnings 33,500 Dividends 8,100 Service revenue 12,300 Salaries expense 4,200 Insurance expense 1,900 Depreciation expense, equipment 2,500 Utilities expense 900 Supplies expense 800 ______ Total $147,200 $147,200

Req 4

The adjusted trial balance will be used to prepare Novelty Nook, Inc.’s financial statements.


(20-25 min.) P 3-51B Req 1

Revenues and Expenses for January

Date Impact on Revenues or Expenses $ Affect on Revenues or

Expenses Jan. 1 No effect

3 Increase revenues $4,150 6 No effect 8 Increase expenses $1,160

12 No effect 18 Increase revenues $1,600 23 No effect 26 No effect 30 Increase expenses $1,615 31 Increase expenses $1,200 31 Increase revenues $875

Req 2

Revenues ($4,150 + $1,600 + $875) $6,625

Expenses ($1,160 + $1,615 + $1,200) $3,975

Net Income ($6,625 - $3,975) $2,650

Req 3

The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.


(20-25 min.) P 3-52B Req 1

Ocean Realty, Inc. Income Statement

Year Ended March 31, 2014

Revenue: Service revenue $88,000 Interest revenue 960 Total Revenues $88,960Expenses: Salaries expense $43,000 Rent expense 14,000 Depreciation Expense, Equipment 4,200 Utilities expense 2,800 Interest Expense 600 Supplies Expense 300 Total expenses 64,900Net Income $24,060


Ocean Realty, Inc. Statement of retained earnings

Year Ended March 31, 2014

Retained earnings, April 1, 2013 $10,900Add: Net income 24,060Subtotal 34,960Less: Dividends 19,000Retained earnings, March 31, 2014 $15,960

Req. 2

a. The Income statement reports Ocean Realty’s results of operations. Operations were

moderately successful, as shown by the fact that Ocean Realty earned net income of $24,060

for the year.

b. The Balance sheet reports Ocean Realty’s financial position

Ocean Realty, Inc. Balance Sheet

March 31, 2012

ASSETS LIABILITIES Cash $ 10,200 Accounts payable $ 3,300Accounts receivable 11,600 Unearned service revenue 1,800Prepaid rent 1,000 Interest payable 540Supplies 1,300 Salaries payable 1,500Equipment 46,000 Notes payable 9,000Less Accum. Depr., equipmment (12,000) 34,000

Total liabilities 16,140

STOCKHOLDERS’ EQUITY Common stock 26,000 Retained earnings 15,960 Total Stockholders’ equity 41,960 Total liabilities and Total assets $58,100 stockholder’s equity $58,100


(20-25 min.) P 3-53B Req 1

Journal


Jun 30 Service revenue 41,400 Interest revenue 650 Retained earnings 42,050 Close revenue accounts Retained earnings 27,120 Salaries expense 18,100 Rent expense 6,350 Depreciation expense, equipment 1,325 Utilities expense 960 Supplies expense 385 Close expense accounts Retained earnings 4,000 Dividends 4,000 Close dividends


Req 2

KLR Inc.’s ending retained earnings is $21,455 ($10,525 + $42,050 - $27,120 - $4,000).

Req 3

KLR, Inc. Post-Closing Trial Balance

June 30, 2014 ACCOUNT DEBIT CREDIT Cash Accounts receivable Prepaid rent Supplies Equipment Accumulated depreciation, equipment Accounts payable Unearned service revenue Salaries payable Notes payable Common stock Retained earnings Total

$6,20012,7002,650

42031,000

.

$52,970

$4,750 5,900 1,240 2,125

10,000 7,500

21,455 $52,970


Chapter 4: Accounting for a Merchandising Business

Short Exercises

(5-10 min.) S 4-2

Journal


Dec 31 Cost of Goods Sold 1,200 Inventory 1,200 Adjust inventory to physical count

(5-10 min.) S 4-3 Req 1

Journal


Dec 1 Inventory 83,000 Accounts Payable – Outdoor Wear 83,000 Purchase inventory on account Dec 8 Accounts Payable – Outdoor Wear 83,000 Cash ($83,000 × .98) 81,340 Inventory ($83,000 × .02) 1,660 Record payment of inventory purchases within the discount period.

Req 2 Final cost of Inventory = Inventory $83,000 – discount taken $1,660 = $81,340.


(5-10 min.) S 4-4

a. $17,400 - $1,600 = $15,800

b. ($17,400- $1,600) x .99 = $15,642

(5-10 min.) S 4-5

Journal


a. Inventory 11,800 Accounts Payable –Pool Palace 11,800 b. Accounts Payable –Pool Palace 2,300 Inventory 2,300

c. Accounts Payable –Pool Palace 9,500 Cash ($9,500 × .98) 9,310 Inventory ($9,500 × .02) 190


(5-10 min.) S 4-6

Journal


a. Inventory 4,200 Accounts Payable 4,200 Purchase inventory on account b. Inventory 140 Cash 140 Paid freight charges to have inventory delivered c. Accounts Payable 4,200 Cash ($4,200 × .97) 4,074 Inventory ($4,200 × .03) 126 Record payment of inventory purchases within the discount period.


(5-10 min.) S 4-7

Journal


a. Accounts Receivable – Regal Spas 81,000 Sales Revenue 81,000 Cost of Goods Sold 44,500 Inventory 44,500 b. Cash ($81,000 × .96) 77,760 Sales Discount ($81,000 × .04) 3,240 Accounts Receivable – Regal Spas 81,000


(5-10 min.) S 4-8

Journal


Mar 17 Accounts Receivable 640.00 Sales Revenue 640.00 Cost of Goods Sold 360.00 Inventory 360.00 Record sale of inventory on account. 21 Sales Returns and Allowances 185.00 Accounts Receivable 185.00 Inventory 110.00 Cost of Goods Sold 110.00 Record receipt of returned goods. 26 Cash [($640– 185) × .98] 445.90 Sales Discount [($640 – 185) × .02] 9.10 Accounts Receivable ($640 - $185) 455.00 Record payment received within the discount period.


(5-10 min.) S 4-9 Req 1 Net Sales Revenue: Sales Revenue……………………………..…. $ 920.00 Less: Sales Returns and Allowances ………. (290.00) Sales Discounts [($920 − $290) ×.01]... (6.30) Net Sales Revenue……………………………. $ 623.70 Req 2 Net Sales Revenue: $ 623.70 Less: Cost of Goods Sold…(550-175)……………… (375.00) Gross profit……………………………………………. $ 248.70

(5-10 min.) S 4-10 Req 1 a. Cash 6,400 Accounts Receivable 5,700 Inventory 27,000 Supplies 1,950 Prepaid Rent 2,400 Total Current Assets $ 43,450 b. Accounts Payable $ 14,800 Salaries Payable 2,150 Unearned Revenue 7,300 Total Current Liabilities $ 24,250 c. Equipment $ 43,000 Less: Accumulated Depreciation, Equipment (4,200) $38,800 Building $ 121,000 Less: Accumulated Depreciation, Building (53,000) 68,000 Book Value of Plant Assets $ 106,800 d. Total Long-Term Liabilities (Note Payable, Long Term) $46,000


(10-15 min.) S 4-11 Req. 1

The Skate Shed, Inc. Income Statement

Year Ended January 31, 2014 Net sales revenue $41,500Cost of goods sold 21,000Gross profit 20,500Operating expense 6,475Operating income 14,025Other Expense: Interest expense 375Net income $13,650


(10-15 min.) S 4-12

The Skate Shed, Inc. Balance Sheet

January 31, 2014 Assets

Current assets: Cash $ 2,750 Accounts Receivable 3,100 Inventory 4,700 Prepaid Rent 1,200 Total current assets 11,750 Long-term assets: Equipment, net 25,700 Total assets $37,450

Liabilities

Current liabilities: Accounts Payable $ 4,800 Salaries Payable 1,150 Accrued Liabilities 2,475 Total current liabilities 8,425 Long-term liabilities: Long-Term Notes Payable 23,000 Total liabilities 31,425

Stockholders’ equity Total stockholders’ equity 6,025 Total liabilities and stockholders’ equity $37,450


(10-15 min.) S 4-13

Gross Profit Percentage

= Gross Profit

=($41,500 - $21,000)

= 0.494 or 49.4% Net Sales Revenue $41,500

Net income percentage

=

Net income

= ($41,500 - $21,000 - $6,475 - $375)

= 0.329 or 32.9% Net sales

revenue $41,500


Exercises

(5-10 min.) E 4-25B Req 1

Journal


Cost of Goods Sold 2,400 Inventory 2,400 Adjust inventory to physical count Req 2 The most likely cause of the inventory balance according to the physical count differing from the ledger balance is that inventory has been lost, stolen, or damaged.


(10-15 min.) E 4-26B

Journal


Nov 15 Inventory 4,300 Accounts Payable 4,300 18 Inventory 350 Cash 350 20 Accounts payable 300 Inventory 300 28 Accounts Payable ($4,300 - $300) 4,000

Cash ($4,000 × .97) 3,880 Inventory ($4,000 × .03) 120


(10-15 min.) E 4-27B

Journal


Dec 3 Inventory 7,775 Accounts Payable 7,775 Purchased inventory on account. 6 Accounts payable 1,250 Inventory 1,250 Returned damaged inventory to supplier. 12 Accounts Payable ($7,775 - $1,250) 6,525

Cash ($6,525 - 121) 6,404 Inventory [($7,300-1,250) x .02] 121 Paid invoice in full.


(10-15 min.) E4-28B Req 1

Journal


Nov 14 Accounts Receivable 2,700 Sales Revenue 2,700 Cost of Goods Sold 1,050 Inventory 1,050 16 Delivery Expense 195 Cash 195 20 Sales Returns and Allowances 300 Accounts Receivable 300 Inventory 115 Cost of Goods Sold 115 23 Cash ($2,400 × .97) 2,328 Sales Discount ($2,400 × .03) 72 Accounts Receivable ($2,700 - $300) 2,400


(10-15 min.) E 4-29B

Journal


Nov 3 Accounts Receivable 1,800.00 Sales Revenue 1,800.00 Cost of Goods Sold ($1,800.00 x .55) 990.00 Inventory 990.00 Record sale of inventory on account. 3 Accounts Receivable 75.00 Cash 75.00 Record prepayment of shipping charges. 7 Sales Returns and Allowances 150.00 Accounts Receivable 150.00 Inventory (150.00 x .55) 82.50 Cost of Goods Sold 82.50 Record return of goods from customer. 16 Cash ($1,800 + $75 - $150 - $33) 1,692.00 Sales Discounts [($1,800– $150) × .02] 33.00 Accounts Receivable ($1,800 + $75 - $150) 1,725.00 Record receipt of payment from customer.


(15-20 min.) E 4-30B

Journal


June 3 Inventory 3,900 Accounts Payable 3,900 6 Accounts Payable 400 Inventory 400 8 Inventory 70 Cash 70 11 Accounts Receivable 1,900 Sales Revenue 1,900 Cost of Goods Sold 800 Inventory 800 12 Accounts Payable ($3,900 - $400) 3,500 Cash ($3,500 × .98) 3,430 Inventory ($3,500 × .02) 70 18 Sales Returns and Allowances 200 Accounts Receivable 200 25 Cash ($1,700× .97) 1,649 Sales Discounts ($1,700 × .03) 51 Accounts Receivable ($1,900 - $200) 1,700


(10-15 min.) E 4-31B

a. Sales * = Net Sales + Sales Discounts = $99,700 + $3,100

= $102,800

b. Net Sales = Gross Profit + Cost of Goods Sold = $27,200 + $72,500

= $99,700

c. Net Sales = Sales – Sales Discounts = $71,000 − $2,600

= $68,400

d. Gross Profit = Net Sales − Cost of Goods Sold = $68,400 − $43,900

= $24,500

e. Sales Discounts = Sales – Net Sales = $112,000 – 98,400

= $13,600

f. Cost of Goods Sold = Net Sales – Gross Profit = $98,400 – 43,600

= $54,800

g Sales = Net Sales + Sales Discounts = $106,500 + 1,200

= $107,700

h. Gross Profit = Net Sales – Cost of Goods Sold = $106,500 - $37,600

= $68,900

* You must find (b) before you find (a).


(10-15 min.) E 4-32B Req 1

Borden’s Furniture, Inc. Income Statement

Year Ended August 31, 2014 Revenues: Net Sales Revenue $ 244,600 Expenses: Cost of Goods Sold $128,700 Selling Expenses 32,400 General Expenses 13,800 Interest expense 1,700 Total Expenses 176,600Net Income $ 68,000

Computations: Net Sales Revenue: $249,000 - $2,500 - $1,900 = $244,600 Req 2 The single-step income statement is not recommended for Borden’s’s Furniture because they are a merchandiser. A merchandiser should use a multi-step income statement to provide more detailed information to the financial statement users.


(15-20 min.) E 4-33B Req 1

Borden’s Furniture, Inc. Income Statement

Year Ended August 31, 2014 Sales Revenue $249,000 Less: Sales Returns and Allowances $2,500 Sales Discounts 1,900 4,400 Net Sales Revenue 244,600Cost of Goods Sold 128,700Gross Profit 115,900Operating Expenses: Selling Expenses 32,400 General Expenses 13,800 46,200Operating Income 69,700Other Expense: Interest expense 1,700Net income $68,000

Req 2


= Gross Profit

=$115,900

= .474or 47.4% Net Sales Revenue $244,600

Req 3 Borden’s Furniture, Inc.’s gross profit rate of 47.4% in 2014 has improved from the gross profit rate of 41.3% in 2013. Borden’s Furniture, Inc. has retained a higher percentage of every dollar of net sales revenue to use towards covering operating expenses, interest expense and generating net income than it did in 2013.


(15-20 min.) E 4-34B Req 1

Borden’s Furniture, Inc. Balance Sheet

August 31, 2014 Assets Liabilities

Current assets: Current Liabilities: Cash 11,600 Accounts Payable $ 5,100 Accounts Receivable 6,300 Salaries Payable 2,600 Inventory 8,300 Unearned Revenues 3,100 Prepaid Rent 1,900 Total Current

Liabilities $ 10,800

Supplies 2,400 Long-term liabilities: Total current assets $ 30,500 Long-Term Notes

Payable 60,000

Long-term assets: Mortgage Payable 21,500 81,500 Equipment 32,000 Total liabilities 92,300 Less Accumulated Depreciation, Equip 12,700 19,300 Stockholders’ Equity Common Stock 15,000 Building 155,000 Retained Earnings* 58,800 Less Accumulated Total Stockholders’

Equity 73,800

Depreciation, Bldg 38,700 116,300 Total Liabilities and Total assets $ 166,100 Stockholders’ Equity $ 166,100

*Retained Earnings = ($56,000 Beginning Balance + $68,000 Net Income - $65,200 Dividends) = $58,800.


(10-15 min.) E 4-35B

Earnings per Share =Net Income

=$9,000,000

= $15 per share Ave. Shares Outstanding 600,000


= Gross Profit **

= $31,600,000

= .504 or 50.4% Net Sales Revenue * $62,600,000

* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($67,000,000 - $2,800,000 - $1,600,000) = ($62,600,000) ** Gross Profit = (Net Sales Revenue – Cost of Goods Sold) = ($62,600,000 - $31,000,000) = $36,000,000

Net Income Percentage

= Net Income

= 9,000,000

= .143 or 14.3% Net Sales Revenue * $62,600,000

* Net Sales Revenue = (Sales Revenue – Sales Returns and Allowances – Sales Discounts) = ($67,000,000 - $2,800,000 - $1,600,000) = ($62,600,000)


Problems

(15-20 min.) P 4-43B Req. 1

Journal


Jun 3 Inventory 7,700 Cash 7,700 9 Supplies 650 Accounts Payable – Supplies Unlimited 650 16 Inventory 5,600

Accounts Payable – Brown International, Inc.

5,600

22 Accounts Payable – Brown International, Inc. 450 Inventory 450 30 Accounts Payable – Supplies Unlimited 650 Cash 650

30 Accounts Payable – Brown

International, Inc. ($5,600- $450) 5,150

Cash ($5,100 x .98) 5,047 Inventory ($5,100 x .02) 103


(10-15 min.) P4-44B Req 1

Journal


Apr 3 Accounts Receivable – B. Levin 3,200 Sales Revenue 3,200 Cost of Goods Sold 1,400 Inventory 1,400 4 Delivery Expense 85 Cash 85 10 Cash 2,300 Sales Revenue 2,300 Cost of Goods Sold 1,025 Inventory 1,025 17 Cash ($3,200 x .99) 3,168 Sales Discount ($3,200 x .01) 32 Accounts Receivable – B. Levin 3,200 22 Accounts Receivable – A. Klecans 4,800 Sales Revenue 4,800 Cost of Goods Sold 2,800 Inventory 2,800 26 Sales Returns and Allowances 900 Accounts Receivable – A. Klecans 900 30 Cash ($3,900 × .98) 3,822 Sales Discount ($3900× .02) 78 Accounts Receivable – A. Klecans ($4,800 -

$900) 3,900


(20-25 min.) P 4-45B Req 1 Tanaka’s Antique Furniture

Journal


Aug 4 Inventory 7,100 Accounts Payable - R.S. Furniture

Warehouse 7,100

Record purchase of inventory on account. 7 Inventory 275 Cash 275 Record payment of freight charges. 10 Accounts Payable – R.S. Furniture Warehouse 1,300 Inventory 1,300 Record inventory returned to supplier. 18 Accounts Payable – R.S. Furniture Warehouse 1,800 Cash ($1,800x .98) 1,764 Inventory ($1,800 × .02) 36 Record partial payment of invoice. 31 Accounts Payable – R.S. Furniture Warehouse

($7,100– $1,300 - $1,800)

4,000 Cash 4,000 Record payment of remainder of invoice in full.


Req 2 R.S. Furniture Warehouse

Aug 4 Accounts Receivable - Tanaka’s Antique Furniture 7,100 Sales Revenue 7,100 Cost of Goods Sold 3,900 Inventory 3,900 Record sale of inventory on account. 10 Sales Returns and Allowances 1,300 Accounts Receivable - Tanaka’s Antique

Furniture 1,300

Inventory 700 Cost of Goods Sold 700 Record receipt of returned goods. 18 Cash ($1,800 .98) 1,764 Sales Discount ($1,800 x .02) 36 Accounts Receivable - Tanaka’s Antique

Furniture 1,800

Record partial payment received. 31 Cash 4,000 Accounts Receivable - Tanaka’s Antique

Furniture ($7,100- $1,300 - $1,800)

4,000

Record payment on remainder of invoice received.


(20-25 min.) P 4-46B

Journal


Nov 4 Inventory ($5,100 + $75) 5,175 Accounts Payable – Salem Tire 5,175 Record purchase of inventory on account 7 Supplies 600 Accounts Payable – Office Maxx 600 Record purchase of supplies on account 9 Accounts Receivable – T. Thompson 1,250 Sales Revenue 1,250 Cost of Goods Sold 750 Inventory 750 Record sale on account 11 Delivery Expense 50 Cash 50 Record payment of freight charges 13 Accounts Payable – Salem Tire 700 Inventory 700

Record return of merchandise to supplier

15 Cash 1,300 Sales Revenue 1,300 Cost of Goods Sold 780 Inventory 780 Record cash sales.

16 Accounts Payable – Office Maxx 600 Cash ($600 x .97) 582 Supplies (600 x .03) 18 Record payment for supplies 18 Accounts Payable – Salem Tire ($5,100+ $75 − $700) 4,475 Cash ($4,475 – $88) 4,387 Inventory [($5,100- $700) × .02] 88 Record payment on account within discount period.

20 Sales Returns and Allowances 250


Accounts Receivable – T. Thompson 250 Inventory 170 Cost of Goods Sold 170 Record receipt of returned goods. 22 Inventory 3,500

Cash 3,500

Record purchase of inventory for cash. 23 Cash ($1,000× .99) 990 Sales Discounts ($1,000 × .01) 10

Accounts Receivable – T. Thompson

($1,250 - $250) 1,000

Record payment received on account Req. 2 Sales Revenue ($1,250 + $1,300) $2,550 Less: Sales Returns and Allowance $ 250 Sales Discounts 10 260 Net Sales Revenue 2,290 Cost of Goods Sold ($750+ $780 -$170) 1,360 Gross Profit $ 930


(20-25 min.) P 4-47B Req. 1

Fresh Foods, Inc. Income Statement

Month Ended November 30, 2014 Sales Revenue $214,700 Less: Sales Returns and Allowances $3,800 Sales Discounts 4,300 8,100 Net Sales Revenue 206,600Cost of Goods Sold 102,600Gross Profit 104,000Operating Expenses: Selling Expenses 25,400 General Expenses 20,900 46,300Operating Income 57,700Other Expense: Interest expense 1,350Net income $56,350

Req 2


= Gross Profit

=$104,000

= .503 or 50.3% Net Sales Revenue $206,600

Req 3 Fresh Foods Inc.’s 50.3% gross margin percentage means that each dollar of net sales generates 50.3 cents of gross profit that is used to cover operating expenses, interest expense, and generate net income.


(25-30 min.) P 4-48B Req. 1

Ramirez Industries, Inc. Income Statement

Year Ended October 31, 2014 Sales Revenue $325,800 Less: Sales Returns and Allowances $6,800 Sales Discounts 4,600 11,400 Net Sales Revenue 314,400Cost of Goods Sold 171,600Gross Profit 142,800Operating Expenses: Selling Expenses: Commission Expense 25,700 Advertising Expense 14,600 Delivery Expense 1,400 41,700 General and Administrative Expenses Office Salaries Expense 53,200 Depreciation Expense 13,500 Insurance Expense 10,200 Utilities Expense 5,300 82,200 123,900Operating Income 18,900Other Revenues (Expenses) Interest Expense (1,300)Net Income $17,600

Req 2

Ramirez Industries, Inc. Statement of Retained Earnings Year Ended October 31, 2014

Retained earnings, November 1, 2013 $ 88,250 Plus: Net Income 17,600 Subtotal 105,850 Less: Dividends 10,000 Retained earnings, October 31, 2014 $ 95,850


Req 3

Ramirez Industries, Inc. Balance Sheet

October 31, 2014 Assets

Current Assets: Cash $ 12,200 Accounts Receivable 8,800 Inventory 16,400 Supplies 750 Prepaid Rent 3,500 Total Current Assets 41,650Long-term Assets: Equipment $97,000 Less: Accumulated Depreciation, Equipment 13,000 84,000 Building 125,000 Less: Accumulated Depreciation, Building 41,300 83,700Total assets $209,350

Liabilities Current Liabilities: Accounts Payable $ 17,700 Salaries Payable 1,700 Unearned Sales Revenue 4,100 Total Current Liabilities 23,500Long-Term Liabilities: Mortgage Payable 45,000Total Liabilities 68,500

Stockholders’ Equity Common Stock 45,000Retained Earnings 95,850Total Stockholders’ Equity 140,850 Total Liabilities and Stockholders’ Equity $209,350


(20-25 min.) P 4-49B

Req 1

Earnings per Share =Net Income

=$17,600

= $3.52 per share Ave. Shares Outstanding 5,000

Req 2

Ramirez Industries, Inc.’s earnings per share in 2014 has improved from the earnings per share of $3.27 in 2013. Ramirez Industries, Inc. earned more for each share of stock in 2014 than it did in 2013.

Req 3


= Gross Profit

=$142,800*

= .454 or 45.4% Net Sales Revenue $314,400*

* Numbers are taken from the solution to P4-48B above Req 4 Ramirez Industries, Inc.’s gross profit rate of 45.4% in 2014 has improved from the gross profit rate of 42.6% in 2013. Ramirez Industries, Inc. has retained a higher percentage of every dollar of net sales revenue to use towards covering operating expenses , interest expense, and generating net income than it did in 2013. Req 5

Net Income Percentage

= Net Income

= $17,600*

= .056or 5.6% Net Sales Revenue $314,400*

* Numbers are taken from the solution to P4-48B above

Req 6

Ramirez Industries, Inc.’s net income rate of 5.6% in 2014 has improved from the net income rate of 4.9% in 2013. Ramirez Industries, Inc. has retained a higher percentage of every dollar of net sales as net income than it did in 2013.


Chapter 5: Inventory

Short Exercises

(5-10 min.) S 5-2

Req 1.

The Average-cost method would meet Cunnington Furniture’s goal of averaging out price changes

Req 2.

In order to expense out the newer purchases of goods, Cunnington Furniture would utilize LIFO.

(5-10 min.) S 5-3

Perpetual Inventory Record: FIFO Perpetual Inventory Record - FIFO

Date

Purchases Cost of Goods Sold Inventory on Hand Quantity Unit

Cost Total Cost

Quantity Unit Cost

Total Cost

Quantity Unit Cost

Total Cost

Dec 1

Dec 19

Dec 28

15

$52.00

$780.00

10 2

$54.00 $52.00

$540.00 $104.00

10

10 15

13

$54.00

$54.00 $52.00

$52.00

$540.00

$540.00 $780.00

$676.00

Dec 31 15 $780.00 12 $644.00 13 $676.00


(5-10 min.) S 5-4

Perpetual Inventory Record: FIFO Perpetual Inventory Record - LIFO

Date


Cost Total Cost

Quantity Unit Cost

Total Cost

Quantity Unit Cost

Total Cost

Dec 1

Dec 19

Dec 28

15

$52.00

$780.00

12

$52.00

$624.00

10

10 15

10 3

$54.00

$54.00 $52.00

$54.00 $52.00

$540.00

$540.00 $780.00

$540.00 $156.00

Dec 31 15 $780.00 12 $624.00 13 $696.00

(5-10 min.) S 5-5

Perpetual Inventory Record: FIFO Perpetual Inventory Record – Average-cost

Date


Cost Total Cost

Quantity Unit Cost

Total Cost

Quantity Unit Cost

Total Cost

Dec 1

Dec 19

Dec 28

15

$52.00

$780.00

12

$52.80

$634.00

10

25

13

$54.00

$52.80*

$52.80

$540.00

$1,320.00

$686.00 Dec 31 15 $780.00 12 $634.00 13 $686.00

* ($540.00 + $780.00) / 25 = $52.80


(5-10 min.) S 5-6

Dec 19 Inventory 780.00

Accounts Payable 780.00

Dec 28 Accounts receivable 1,272.00

Sales 1,272.00

Cost of goods sold 624.00

Inventory 624.00

Note - the Dec 28 sale amount is based on the perpetual inventory record from S5-4 above:


(5-10 min.) S 5-7

1. When inventory costs are rising, FIFO will produce the lowest cost of goods sold because the older, lower cost items are assumed to be sold before the newer, higher priced items.

2. When inventory costs are rising, LIFO will produce the highest cost of goods sold because the newer, higher cost items are assumed to be sold before the older, lower priced items.

3. If prices had been declining, FIFO will produce the highest cost of goods sold because the older, higher cost items are assumed to be sold before the newer, lower priced items.

(5-10 min.) S 5-8

__b.__ 1. A company must perform strictly proper accounting only for items that are

significant to the business’s financial statements.

___d._ 2. Reporting the least favorable figures in the financial statements.

___a._ 3. A business’s financial statements must report enough information for users to

make knowledgeable decisions about the company.

___c._ 4. A business should use the same accounting methods and procedures from period to period.


(5-10 min.) S 5-9

Req 1

Mar 31 Cost of goods sold ($10,800-10,640) 160

Inventory 160

Inventory would be reported on the March 31 balance sheet at $10,640

(5-10 min.) S 5-10

Req 1

The inventory would be valued at $13,480 which is the value based on the physical count.

(5-10 min.) S 5-11

__c.__ 1. Conservatism

__f.__ 2. Full disclosure

__g.__ 3. LIFO

__b._ 4. Average-cost

__a.__ 5. FIFO

__d._ 6. Consistency

__h._ 7. Materiality

__e._ 8. Specific- Identification


(5-10 min.) S 5-12

If ending inventory is overstated, $2,800 too much is deducted from Cost of goods available for sale to arrive at Cost of goods sold. Therefore, Cost of goods sold is understated by $2,800. The correct amount for Cost of goods sold would be $139,200($136,400+$2,800).

If Cost of goods sold is understated, too little was deducted from Sales to arrive at Gross profit. Therefore, Gross profit is overstated by $2,800. The correct amount for Gross profit would be $114,500 ($117,300-$2,800))

(5-10 min.) S 5-13

Because the uncorrected ending inventory error in 2014 becomes a beginning inventory error in 2015, the beginning inventory in 2015 is overstated by $3,200.

If beginning inventory is overstated, $3,200 too much is added to purchases to arrive at Cost of goods available for sale. So, Cost of goods available for sale, and therefore Cost of goods sold, is overstated by $3,200 in 2015.

If Cost of goods sold is overstated, too much was deducted from Sales to arrive at Gross profit. Therefore, Gross profit is understated by $3,200 in 2015.

(10-15 min.) S 5-14

Beginning inventory $ 51,600 + Purchases 326,800

= Cost of goods available for sale 378,400 Estimated cost of goods sold: Sales revenue 505,300 - Estimated gross profit of 38 % ($505,300 x 38%) 192,014

= Estimated cost of goods sold 313,286 Estimated ending inventory $ 65,114


(10-15 min.) S 5-15

Inventory

Turnover =

Cost of Goods Sold =

728,000 =

11.8 times

per year Average Inventory ($55,000 + $68,000) / 2


Exercises

(10-15 min.) E 5-28B

Req 1

Perpetual Inventory Record: FIFO Perpetual Inventory Record - FIFO

Date

Purchases Cost of Goods Sold Inventory on Hand Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantit

y Unit Cost Total Cost

Mar1

Mar7

Mar 11

Mar 19

Mar 28

8

13

$108.00

$112.00

$864.00

$1,456.00

6 4

4 5

$100.00 $108.00

$108.00 $112.00

$600.00 $432.00

$432.00 $560.00

6

6 8

4

4 13 8

$100.00

$100.00 $108.00

$108.00

$108.00 $112.00

$112.00

$600.00

$600.00 $864.00

$43200

$432.00 $1,456.00

$896.00

Mar 31 21 $2,320.00 19 $2,024.00 8 $896.00

Req 2

Mar 7 Inventory 864.00 Accounts Payable 864.00 11 Accounts receivable 1,850.00 Sales 1,850.00 Cost of goods sold 1,032.00 Inventory 1,032.00 19 Inventory 1,456.00 Accounts Payable 1,456.00 28 Accounts receivable 1,665.00

Sales 1,665.00 Cost of goods sold 992.00 Inventory 992.00


(10-15 min.) E 5-29B

Req 1

Perpetual Inventory Record: FIFO Perpetual Inventory Record – LIFO

Date


Cost Total Cost

Quantity Unit Cost

Total Cost

Quantity Unit Cost

Total Cost

Mar 1

Mar 7

Mar 11

Mar 19

Mar 28

8

13

$108.00

$112.00

$864.00

$1,456.00

8 2

9

$108.00 $100.00

$112.00

$864.00 $200.00

$1,008.00

6

6 8

4

4 13

4 4

$100.00

$100.00 $108.00

$100.00

$100.00 $112.00

$100.00 $112.00

$600.00

$600.00 $864.00

$400.00

$400.00 $1,456.00

$400.00 $448.00

Mar 31 21 $2,320.00 19 $2,072.00 8 $848.00

Req 2

Mar 7 Inventory 864.00 Accounts Payable 864.00 11 Accounts receivable 1,850.00 Sales 1,850.00 Cost of goods sold 1,064.00 Inventory 1,06400 19 Inventory 1,456.00 Accounts Payable 1,456.00 28 Accounts receivable 1,665.00

Sales 1,665.00 Cost of goods sold 1,008.00 Inventory 1,008.00


(10-15 min.) E5-30B

Perpetual Inventory Record: FIFO Perpetual Inventory Record – Average-cost

Date


Cost Total Cost

Quantity Unit Cost

Total Cost

Quantity Unit Cost Total Cost

Mar 1

Mar 7

Mar 11

Mar 19

Mar 28

8

13

$108.00

$112.00

$864.00

$1,456.00

10

9

$104.57

$110.24

$1,046.00

$992.00

6

14

4

17

8

$100.00

$104.57*

$104.57

$110.24**

$110.24

$600.00

$1,464.00

$418.00

$1,874.00

$882.00

Mar 31 21 $2,320.00 19 $2,038.00 8 $882.00

* ($600.00 + $864.00) / 14 = $104.57 (rounded)

** ($418.00 + $1,456.00)/17 = $110.24 (rounded)

Req 2

Mar 7 Inventory 864.00 Accounts Payable 864.00 11 Accounts receivable 1,850.00 Sales 1,850.00 Cost of goods sold 1,046.00 Inventory 1,046.00 19 Inventory 1,456.00 Accounts Payable 1,456.00 28 Accounts receivable 1,665.00

Sales 1,665.00 Cost of goods sold 992.00 Inventory 992.00


(10-15 min.) E 5-31B

Req 1

FIFO ending inventory = 17 @ $267 – 11@ $267 +16 @ $271 - (6@ $267 and 4 @ $271) – 7 @ $271 = 5 @ $271 = $1,355

Req 2

LIFO ending inventory = 17 @ $267 – 11 @ $267 +16 @ $271 - 10 @ $271 – (6 @ $271 and 1 @ $267) = 5 @ $267 = $1,335

Req 3

FIFO results in the higher cost of ending inventory.

(10-15 min.) E 5-32B

Req 1

FIFO cost of goods sold = 11 @ $267 +(6 @ $267 and 4 @ $271) + 7 @ $271 = $7,520

Req 2

LIFO cost of goods sold = 11 @ $267 + 10 @ $271 + (6 @ $271 and 1 @ $267) = $7,540

Req 3

LIFO results in the higher cost of goods sold.

(15-20 min.) E 5-33B

Req 1

FIFO

Sales Revenue (38 x $160) $6,080

Cost of Goods Sold [(34 x $88) + (4 x $90)] 3,352

Gross Profit $2,728


Req 2

LIFO


Cost of Goods Sold [(29 x $90) + (9 x $88)] 3,402

Gross Profit $2,678

Req 3

Average cost


Cost of Goods Sold (38 x $88.92*) 3,379

Gross Profit $2,701

* ($2,992 + $2,610)/63 = $88.92

Req 4

FIFO results in the largest gross profit. When prices are rising, FIFO results in the lowest cost of goods sold and therefore the highest gross profit.

(10-15 min.) E 5-34B

Req 1

Using LCM, Ridgeview Resources will report the ending inventory at $29,700.

Req 2

No adjusting entry is required because the inventory cost of $29,700 is lower than the market value of $30,600.


(5-10 min.) E 5-35B

Req 1

Apr 30 Cost of Goods Sold 27.75

Inventory ($92.50 -$64.75) 27.75

Req 2

The actual amount of inventory on hand may differ from the amount based on the perpetual inventory records due to errors in recording inventory related transactions or due to inventory shrinkage. Inventory shrinkage is most often the result of theft, damage, or spoilage of inventory items.

(10-15 min.) E 5-36B

Req 1

Sales Revenue $343,000

Cost of Goods Sold ($246,000 + $3,600) * 249,600

Gross Profit $93,400

*If ending inventory is overstated, $3,600 too much is deducted from Cost of Goods Available for Sale to arrive at Cost of Goods Sold. Therefore, Cost of Goods Sold is understated by $3,600.

Req 2


Cost of Goods Sold ($246,000 - $1,800) * 244,200

Gross Profit $98,800

*If ending inventory is understated, $1,800 too little is deducted from Cost of Goods Available for Sale to arrive at Cost of Goods Sold. Therefore, Cost of Goods Sold is overstated by $1,800.


(10-15 min.) E 5-37B

Req 1

Gomez Auto Parts, Inc.

Comparative Income Statement

Years Ended April 30, 2014 and 2013

2014 2013

Sales Revenue $143,000 $119,000

Cost of Goods Sold:

Beginning Inventory $ 9,000* $ 12,500

Net Purchases 79,000 71,000

Cost of Goods Available 88,000 83,500

Ending Inventory 18,000 9,000*

Cost of Goods Sold 70,000 74,500

Gross profit 73,000 44,500

Operating expenses 29,000 23,000

Net income $ 44,000 $ 21,500

* $12,000 - $3,000 = $9,000

Req 2

Net income for the two years combined is the same in both cases—$65,500. The sum of the

correct amounts, $65,500 ($44,000 + $21,500), equals the sum of the incorrect amounts, $65,500

($41,000 + $24,500). The beginning inventory error in 2014 offsets the ending inventory error in

2013.


(5-10 min.) E 5-38B

Beginning inventory 58,000

+ Net purchases 287,000

= Cost of goods available for sale 345,000

-Estimated cost of goods sold:

Net sales revenue $486,000

- Estimated gross profit of 43% ($486,000 x 43%) 208,980

= Estimated cost of goods sold 277,020

Estimated cost of inventory destroyed $ 67,980

(10-15 min.) E 5-39B

Req 1

Inventory

Turnover =

Cost of Goods Sold =

$280,100 =

8.55 times

per year Average Inventory ($44,300 + $21,200) / 2

Req 2

Pete’s Plants 2014 inventory turnover rate of 8.55 times has deteriorated from the 2013 rate of 10.24.


Problems

(15-20 min.) P 5-48B

Req 1

The inventory method that most likely mimics the physical flow of Top Line Equipment’s inventory is FIFO because FIFO assigns the cost of the oldest items to cost of goods sold first.

Req 2

Perpetual Inventory Record: FIFO

Perpetual Inventory Record - LIFO

Date

Purchases Cost of Goods Sold Inventory on Hand

Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost Quantity Unit Cost Total Cost

Nov 1

Nov 6

Nov 13

Nov 19

Nov 25

Nov 29

105

150

$134.00

$136.00

$14,070.00

$20,400.00

100

110

40 5 60

$134.00

$136.00

$136.00 $134.00 $120.00

$13,400.00

$14,960.00

$5,440.00 $670.00

$7,200.00

95

95 105

95 5

95 5

150

95 5 40

35

$120.00

$120.00 $134.00

$120.00 $134.00

$120.00 $134.00 $136.00

$120.00 $134.00 $136.00

$120.00

11,400.00

$11,400.00 $14,070.00

$11,400.00 $670.00

$11,400.00 $670.00

$20,400.00

$11,400.00 $670.00

$5,440.00

$4,200.00

Nov 30 255 $34,470.00 315 $41,670.00 35 $4,200.00


Req. 3

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Nov 6 Inventory 14,070 Accounts Payable 14,070

13 Accounts Receivable 28,000 Sales Revenue (100 $280) 28,000 Cost of Goods Sold 13,400 Inventory 13,400

19 Inventory 20,400 Accounts Payable 20,400

25 Accounts Receivable 30,800 Sales Revenue (110 $280) 30,800 Cost of Goods Sold 14,960 Inventory 14,960

29 Accounts Receivable 29,400 Sales Revenue (105 $280) 29,400 Cost of Goods Sold ($5,440 + $670 + $7,200) 13,310 Inventory 13,310

30 Accounts payable 16,300 Cash 16,300

30 Operating expenses 9,000 Cash ($9,000 x 2/3) 6,000 Accounts Payable ($9,000 x 1/3) 3,000


(15-20 min.) P 5-49B

Req 1


Perpetual Inventory Record – Average-cost

Date

Purchases Cost of Goods Sold Inventory on Hand Quantity Unit Cost Total Cost Quantity Unit

Cost Total Cost Quantity Unit Cost Total Cost

Nov 1

Nov 6

Nov 13

Nov 19

Nov 25

Nov 29

105

150

$134.00

$136.00

$14,070.00

$20,400.00

100

110

105

$127.35

$132.54

$132.54

$12,735.00

$14,579.00

$13,917.00

95

200

100

250

140

35

$120.00

$127.35*

$127.35

$132.54**

$132.54

$132.54

$11,400.00

$25,470.00

$12,735.00

$33,135.00

$18,556.00

$4,639.00

Nov 30 255 $34,470.00 315 $41,231.00 35 $4,639.00

* ($11,400.00 + $14,070.00) /200 = $127.35

** ($12,735.00 + $20,400.00)/250 = $132.54

Req 2

Top Line Equipment

Income Statement

Month ended November 30


Cost of Goods Sold 41,231

Gross Profit $ 46,969

Operating Expenses 9,000

Net income $ 37,969

Computations:

Sales revenue: [(100 x $280) + (110 x $280) + (105 x $280)] = $88,200


(15-20 min.) P 5-50B

Req 1

Because inventory prices are rising, the LIFO inventory method will result in Lakeside Industries paying the lowest income taxes. The LIFO method assigns the most recent cost (in this case the highest) to cost of goods sold which results in lower net income and, therefore, lower income taxes.

Req 2


Perpetual Inventory Record – FIFO

Date


Quantity Unit Cost

Total Cost Quantity Unit Cost


Total Cost

Aug 1

Aug 4

Aug12

Aug 22

Aug 31

70

56

$92.00

$95.00

$6,440.00

$5,320.00

35 46

24 20

$90.00 $92.00

$92.00 $95.00

$3,150.00 $4,232.00

$2,208.00 $1,900.00

35

35 70

24

24 56

36

$90.00

$90.00 $92.00

$92.00

$92.00 $95.00

$95.00

$3,150.00

$3,150.00 $6,440.00

$2,208.00

$2,208.00 $5,320.00

$3,420.00

Aug 31 126 $11,760.00 125 $11,490.00 36 $3,420.00

Req 3


Perpetual Inventory Record - LIFO

Date


Quantity Unit Cost Total Cost Quantity Unit Cost


Total Cost

Aug 1

Aug 4

Aug 12

Aug 22

Aug 31

70

56

$92.00

$95.00

$6,440.00

$5,320.00

70 11

44

$92.00 $90.00

$95

$6,440.00 $990.00

$4,180.00

35

35 70

24

24 56

24 12

$90.00

$90.00 $92.00

$90.00

$90.00 $95.00

$90.00 $95.00

$3,150.00

$3,150.00 $6,440.00

$2,160.00

$2,160.00 $5,320.00

$2,160.00 $1,140.00

Aug 31 126 $11,760.00 125 $11,610.00 36 $3,300.00


Req 4


Perpetual Inventory Record – Average-cost

Date


Cost Total Cost Quantity Unit

Cost Total Cost Quantity Unit Cost Total

Cost

Aug 1

Aug 4

Aug 12

Aug 22

Aug 31

70

56

$92.00

$95.00

$6,440.00

$5,320.00

81

44

$91.33

$93.90

$7,398.00

$4,132.00

35

105

24

80

36

$90.00

$91.33*

$91.33

$93.90**

$93.90

$3,150.00

$9,590.00

$2,192.00

$7,512.00

$3,380.00

Aug 31 126 $11,760.00 125 $11,530.00 36 $3,380.00

* ($3,150.00 + $6,440.00) /105 = $91.33 (rounded)

** ($2,192.00 + $5,320.00)/80 = $93.90

(10-15 min.) P 5-51B

Req 1

Conservatism is the reason to account for inventory at the lower-of-cost-or-market value. Conservatism directs accountants to decrease the accounting value of an asset if it appears unrealistically high.

Req 2

SoCal Sporting Goods should value its ending inventory at December 31, 2014 at the current replacement cost of $73,850 because it is less than SoCal Sporting Goods’ actual cost of $75,230.

Req 3

Journal


Dec 31 Cost of Goods Sold 1,380 Inventory ($75,230 - $73,850) 1,380 Write inventory down to market value.


(10-15 min.) P 5-52B

Req 1

Freeze It Corp. should report inventory at the current replacement cost of $149,300 ($160,500 - $11,200) on its July 31, 2014 balance sheet.

Req 2

Freeze It Corp. should report cost of goods sold of $682,200 ($671,000 + $11,200) for the period.

Req 3

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

July 31 Cost of Goods Sold

11,200

Inventory 11,200

Write inventory down to market value.


(20-25 min.) P 5-53B

Req 1

Prior to correction Net income for the year was:

2014 2013 2012

Overstated by $8,000

Overstated by $5,000

Understated by $5,000

Req 2

Ling Supply Co. Income Statements

For the Years Ended December 31, 2012, 2013, & 2014

( in thousands) 2014 2013 2012 Sales Revenue $ 198 $ 177 $ 179Cost of Goods Sold: Beginning Inventory $ 16 $ 24 $ 6 Net Purchases 145 112 132 Cost of Goods Available 161 136 138 Ending Inventory 15 16 24 Cost of Goods Sold 146 120 114Gross Profit 52 57 65Operating Expenses 42 41 43Net Income $ 10 $ 16 $ 22

Req 3

There is no impact on the 2014 income statement if the 2012 inventory error is left uncorrected. The ending inventory in 2012 becomes the beginning inventory in 2013 so the net income in 2013 is misstated by the exact opposite amount that it was misstated by in 2012. However, the 2012 error will not carry forward into 2014.


(15-20 min.) P 5-54B

Req. 1

Beginning Inventory $ 43,400

+ Net Purchases 287,300

= Cost of Goods Available for Sale 330,700

Estimated Cost of Goods Sold:

Sales $488,400

Less: Sales Returns and Allowances $81,500

Sales Discounts 5,900 87,400

Net Sales 401,000

- Estimated gross profit of 39% ($401,000 x 39%) 156,390

= Estimated cost of goods sold 244,610

Estimated ending inventory $ 86,090

Req. 2

Inland Empire Supply, Inc.

Income Statement (partial)

Month Ended July 31, 2014

Sales $ 488,400

Less: Sales Returns and Allowances $ 81,500

Sales Discounts 5,900 87,400

Net Sales $ 401,000

Cost of Goods Sold 244,610

Gross Profit $ 156,390


(15-20 min.) P 5-55B

Req. 1

2014

Inventory Turnover

= Cost of Goods Sold

=$153,000

= 7.29 times per year Average Inventory ($24,000 + $18,000) / 2

2013 Inventory Turnover

= Cost of Goods Sold

=$151,000

= 5.81 times per year Average Inventory ($28,000+ $24,000) / 2

Req 2

2014

Days-Sales-in-inventory

= (24,000 + 18,000)/2 = 50.1 days

(153,000/365)

2013

Days-Sales-in-inventory

= (28,000 + 24,000)/2

= 62.8 days

(151,000/365)

Req 3

Keystone Electronics, Inc.’s cost of goods sold remained relatively constant from 2013 to 2014. Therefore, the most likely cause for the change in the inventory turnover was the decrease in the average inventory from 2013 ($26,000) to 2014 ($21,000)


Chapter 6: The Challenges of Accounting: Standards, Internal Control, Audits, Fraud, and Ethics

Short Exercises

(5–10 min.) S 6-1

1 F

2 CR

3 B

4 F

5 E

(5–10 min.) S 6-2

1 P

2 P

3 R

4 O

5 P

(5–10 min.) S 6-3

Student answers will vary.

1. It can be argued that any one of the four objectives is the most important. However, many students feel that the safeguarding of assets is the most important. In fact, all of the objectives are equally important.


2. In order for the business to survive in the long run, each of the objectives must be accomplished. The failure to accomplish any of the objectives can leave the business susceptible to such things as erroneous financial reporting, theft, or fraud. Any one of these may harm the company to the extent that its survival is in jeopardy.

(5–10 min.) S 6-4

1 ADR

2 RA

3 PA

4 RA

5 SD

(10–15 min.) S 6-5

Student answers will vary.

Separation of duties helps prevent employees from being able to steal assets and then cover up the theft. This is why it is often referred to as the cornerstone of internal controls over the safeguarding of assets. If an employee has custody of cash (they make the daily deposits) and records the daily cash sales, they could steal money from the daily deposit and then alter the amount of the daily cash sales that were recorded in order to hide the theft.

(5–10 min.) S 6-6

1 R

2 P

3 P

4 O

5 P

6 R


(5–10 min.) S 6-7

1 A

2 L

3 A

4 O

5 A

6 L

7 O

8 A

9 L

10 0

(5–10 min.) S 6-8

1 b

2 d

3 a

4 e

5 c


(5–10 min.) S 6-9

a. Strength. When an employee is on vacation, errors or irregularities may be detected by the individual filling in for the employee who is on vacation.

b. Weakness. The accounting department should not be allowed to order merchandise and approve payment. An accountant could have goods sent to his / her home and then approve payment for the goods.

c. Strength. By not allowing the sales clerk access to both the cash and the accounting records, it is more difficult for the clerk to steal cash and hide the theft.

d. Weakness. The officer should examine the payment packet to ensure that the payment is for the correct amount.

(5–10 min.) S 6-10

a. Separation of duties (The same person is ordering merchandise and approving payment.)

b. Separation of duties (The same person is selling tickets and taking tickets.)

c. Adequate documents and records (No sales receipt is being prepared.)

d. Proper authorization (No authorization is required for sales returns.)

e. Adequate documents and records (No receiving report is being prepared.)


(15–20 min.) S 6-11

Requirement 1 Requirement 2 Requirement 3

Missing Internal

Control Possible Problem Solution a. Separation of duties Theft Assign accounting and cash

handling duties to separate employees.

b. Authorization Financial loss. Require proper authorization by management prior to granting credit to customers.

c. Documentation Theft Order pre-numbered receipts from another vendor.

d. Separation of duties Theft Do not allow cashiers to record sales in accounting records.

(5–10 min.) S 6-12

1 i.

2 f.

3 j.

4 b.

5 e.

6 g.

7 d.

8 a.

9 h.

10 c.


(20-25 min.) S 6-13

Student answers may vary

The main provisions of the Sarbanes-Oxley Act are:

• It applies to publicly traded companies.

• It established the Public Company Accounting Oversight Board (PCAOB).

• It requires that external auditors report to an audit committee, rather than to an

organization’s management. Prior to Sarbanes-Oxley, the external auditors often

reported to a company’s upper management.

• It requires that a company’s Chief Executive Officer (CEO) and Chief Financial Officer

(CFO) certify all annual, or quarterly, reports filed by an organization.

(20-25 min.) S 6-14

Student answers may vary

US GAAP is primarily only utilized in the US compared to IFRS which is used by many

countries in the world. US GAAP is a rules-based system with numerous rules compared to

IFRS which is a principles-based system that utilizes overriding principles and a smaller number

of rules. US GAAP utilizes historical cost as its primary method of valuation compared to IFRS

which utilizes fair market value as its primary method of valuation.


(10-15 min.) EB-1A

a. Future Value of $1 at 7% for 6 years

(Exhibit B-1)

Future value

$8,000 1.501 = $12,008

b. Present Value of Annuity of $1 at 12%

for 4 years (Exhibit B-4)

Present value

$3,000 3.037 = $9,111

c. Future Value of Annuity of $1 at 10%


Future Value

$4,500 3.310 = $14,895

d. Present Value of $1 at 6% for 10 years

(Exhibit B-3)

Present Value

$29,000 .558 = $16,182


(10-15 min.) EB-2A

Some students may predict that Plan A will provide the larger future value because the amount

invested, $30,000 ($3,000 10), is greater than the $25,000 invested with plan B.

Future Value of Annuity of $1 at 8%


Future Value

Plan A: $ 3,000 14.487 = $43,461

Future Value of $1 at 6% for 10 years

(Exhibit B-1)

Future value

Plan B: $25,000 1.791 = $44,775

Plan B provides the larger future.


(10-15 min.) EB-3A

Req 1

Present Value of Annuity of $1 at 8%


Present value

a. Tanner: $55,000 3.312 = $182,160

Present Value of $1 at 8% for 4 years

(Exhibit B-3)

Present Value

b. Phoenix: $250,000 .735 = $183,750

Req 2

Student answers may vary. However, in addition to the present value cost of the equipment,

Hobart Parts, Inc. should consider the following when determining which company to purchase the

equipment from:

The warranties offered by the two companies.

The reputation of the two companies.

The stability/financial strength of the two companies.


Chapter 7: Cash and Receivables

Short Exercises

(10-15 min.) S 7-2

− Bank 1. Outstanding checks

+ Bank 2. Deposits in transit

− Book 3. NSF check

+ Book 4. Bank collection of our note receivable

+ Book 5. Interest earned on bank balance

− Book 6. Bank service charge

− Book 7. Book error: We credited Cash for $200. The correct amount of the check was $2,000

+ Bank 8. Bank error: The bank decreased our account for a check written by

another customer


(5-10 min.) S 7-3

Sinclair Food Service Bank Reconciliation

October 31, 2014

Bank Book Balance, October 31 $3,890 Balance, October 31 $2,605 Add: Add: Deposit in transit 240 Bank collection 630 4,130 Interest revenue 5 3,240 Less: Less: Outstanding checks (930) Service charge (40)Adjusted bank balance $3,200 Adjusted book balance $3,200

Amounts agree


(5-10 min.) S 7-4

Journal


May 31 Cash 5 Interest revenue 5 Record interest earned on bank balance. 31 Miscellaneous expense 25 Cash 25 Record bank service charge. 31 Accounts receivable 132 Cash 132 Record NSF checks

(5-10 min.) S 7-5

Assets Current Assets:

Cash $ 21,700 Accounts receivable 54,200 Inventory 85,800

Total Current Assets $161,700

Computations: Cash in bank accounts plus Petty cash = $21,400+ $300 = $21,700


(5-10 min.) S 7-6

f. 1. A contra-account, related to accounts receivable, which holds the estimated

amount of uncollectible receivables

i. 2. A method of accounting for uncollectible receivables in which the company

waits until a specific customer’s account receivable is uncollectible before recording Bad debt

expense

e. 3. A method of recording receivable losses on the basis of estimates instead of

waiting to see which customers the company will not collect from

a. 4. The party to a credit transaction who sells goods or a service and obtains a

receivable

h. 5. A way to estimate uncollectible accounts by analyzing individual accounts

receivable according to the length of time they have been receivable

b. 6. The party to a credit transaction who makes a purchase and has a payable

d. 7. Cost to the seller of credit sales; arises from the failure to collect from credit

customers

g. 8. A method of estimating uncollectible receivables that calculates Bad debt

expense based on net credit sales

(5-10 min.) S 7-7 Accounts receivable balance at October 31:

Accounts receivable Bal. 16,500 Collections 19,000Services on account

21,000 Write-offs 1,600

Bal. 16,900 Macintosh probably does not expect to collect all $16,900 of the accounts receivable because, realistically, she knows she will most likely not be able to collect from some clients.


(5-10 min.) S 7-8

Journal


Dec 31 Bad debt expense ($620,000 .03) 18,600 Allowance for uncollectible accounts 18600 Record estimate of uncollectible accounts for the year.

2. Balance sheet (partial): Accounts receivable $177,400 Less: Allowance for uncollectible accounts 18,600 Accounts receivable, net $158,800


(5-10 min.) S 7-9

Journal

DATE ACCOUNTS AND EXPLANATIONS POST REF. Dr. Cr.

a. Accounts receivable 545,000 Service revenue 545,000 Record service revenue.

b. Cash 575,000 Accounts receivable 575,000 Record collections on account.

c. Allowance for uncollectible accounts 19,000 Accounts receivable 19,000 Write off uncollectible accounts.

d. Bad debt expense ($545,000 .03) 16,350

Allowance for uncollectible accounts 16,350 Record estimate of uncollectible accounts for the year.


(5-10 min.) S 7-10

Journal


a. Accounts receivable 322,000 Sales revenue 322,000 Record sales on account.

b. Cash 309,000 Accounts receivable 309,000 Record collections on account.

c. Allowance for uncollectible accounts 12,400 Accounts receivable 12,400 Write off uncollectible accounts.

d. Bad debt expense 10,700 Allowance for uncollectible accounts 10,700 Record estimate of uncollectible accounts for the year.

Allowance for uncollectible accounts Write-offs 12,400 Bal. 9,000 Bad debt expense

X

= 10,700 Bal. 7,300

Alternative solution: Ending balance = Beginning balance – write offs + Bad debt expense Where X = Bad debt expense, $87,300 = $9,000 - $12,400 + X $7,300 + $12,400 - $9,000 = X $10,700 = X


(5-10 min.) S 7-11

Journal


2014 Dec. 31

Bad debt expense ($3,768 – $2,000)

1,768 Allowance for uncollectible accounts 1,768 Record estimate of uncollectible accounts for the year.


(5-10 min.) S 7-11 continued Computations: Required balance for Allowance for Uncollectible Accounts based on the aging schedule:

Age of Accounts

1-30 Days 31-60 Days 61-90 Days Over

90 Days Total

Receivables Amount receivable

$66,000 $24,000 $12,000 $3,600 $105,600

Estimate percentage uncollectible

X 1% X 2% X 6% X 53%

Required balance for Allowance for Uncollectible Accounts

$660 + $480 + $720

+ $1,908 = $ 3,768

Allowance for uncollectible accounts Bal. 2,000 Bad debt expense = 1,768 Bal. 3,768

(10-15 min.) S 7-12

Procedure b is the only procedure that includes an internal control weakness. The internal control weakness is the lack of separation of duties that allows the Credit Department to receive incoming cash receipts from customers and the authority to write-off an account receivable. With access to cash, a credit-department employee can pocket cash received from a customer and destroy the related remittance slip. The employee can then authorize the write-off of the customer’s account as uncollectible, and the company will stop pursuing collection from the customer. To strengthen the controls, the company can have customer checks go to a lock box controlled by a bank or to the company mailroom, not to the credit department.


(10-15 min.) S 7-13

i 1. A written promise to pay a specified amount of money at a particular future date

e 2. The date when final payment of the note is due; also called the due date.

c 3. The percentage rate of interest specified by the note for one year

g 4. The entity to whom the maker promises future payment

b 5. The period of time during which interest is earned

h 6. The amount loaned out by the payee and borrowed by the maker of the note

f 7. The sum of the principal plus interest due at maturity

d 8. The entity that signs the note and promises to pay the required amount

a 9. The revenue to the payee for loaning money; the expense to the debtor

(10-15 min.) S 7-14 Note 1: $25,000 .09 11/12 = $2,063 Note 2: $42,000 .08 75/360 = $700 Note 3: $10,000 .06 45/360 = $75 Note 4: $125,000 .04 9/12 = $3,750


(10-15 min.) S 7-15

Journal


1. June 12 Note receivable—R. Simmons 125,000 Cash 125,000 2. July. 12 Cash ($125,000 + $625) 125,625 Note receivable—R. Simmons 125,000 Interest revenue ($125,000 .06 30/360) 625

(5-10 min.) S 7-16

Rhodes Peters Cash $15,000 $23,000Short-term investments 6,000 13,000Net receivables 41,000 51,000= Total quick assets $62,000 $87,000÷ Current liabilities ÷ $40,000 ÷$108,750= Quick ratio 1.55 .80


(5-10 min.) S 7-17

Simpson Martinez Net Credit Sales $90,000 $48,000

Divide by average Net Accounts Receivable* $16,500 $22,000 Equals accounts receivable turnover 5.45 2.18

* (Net accounts receivable, beginning + Net accounts receivable, ending)/2


Exercises

(20-25 min.) E 7-31B Req. 1

Cliff’s Construction

Bank Reconciliation

April 30, 2014

Bank Book

Balance, April 30 $1,363 Balance, April 30 $3,606

Add:

Deposit in transit 2,890

4,253 Less:

Correction of book error—

Less: Recorded $76 check

Outstanding checks as $67 9

No. 926 186 Cost of checks 32

No. 927 527 Service charge 25

Adjusted bank balance $3,540 Adjusted book balance $3,540

Cliff’s Construction’s account actually has cash of $3,540 on April 30.


Req. 2

Journal


Apr 30 Accounts payable 9 Cash 9 To correct error on check written to vendor. 30 Miscellaneous expense 57 Cash 57 Record bank service charge and cost of checks.

(20-25 min.) E 7-32B Req. 1

Addison Picture Frames

Bank Reconciliation

November 30

Bank Book

Balance, November 30 $1,030 Balance, November 30 $3,304

Add: Add:

Deposit in transit 2,700 EFT collection—rent 410

3,730 3,714

Less:

Correction of book error—

Less: Recorded $330 check as $33 297

Outstanding checks Service charge 23

No. 213 300 Charge for printed checks 14

No. 214 150 NSF checks 100



Req. 2

Journal


Nov 30 Cash 410 Rental income 410 To record rental income 30 Salaries expense 297 Cash 297 To correct error on check written to pay salaries. 30 Miscellaneous expense 37 Cash 37 Record bank service charge and cost of checks. 30 Accounts receivable 100 Cash 100 Record NSF checks (5-10 min.) E 7-33B

Journal

DATE ACCOUNTS AND EXPLANATIONS POSTREF. Dr. Cr.

May 3 Accounts receivable – B. Wilson 1,300 Service revenue 1,300 Record service revenue. Nov. 8 Bad debt expense 1,300 Accounts receivable – B. Wilson 1,300 Write off uncollectible accounts. Dec. 10 Accounts receivable – B. Wilson 1,150 Bad debt expense 1,150 Reinstate part of B. Wilson account Dec 10 Cash 1,150 Accounts receivable – B. Wilson 1,150 Record receipt of cash on account


(10-15 min.) E 7-34B Req. 1

Journal


a. Cash 60,000 Accounts receivable 98,000 Sales revenue 158,000 Record sales. b. Cash 77,000 Accounts receivable 77,000 Record collections on account. c. Allowance for uncollectible accounts 900 Accounts receivable 900 Write off uncollectible accounts. d. Bad debt expense ($98,000 .01) 980 Allowance for uncollectible accounts 980 Record estimate of uncollectible accounts for the

month.

Req. 2

Accounts receivable Allowance for uncollectible accounts Bal. 30,000 Collections 77,000 Write-offs 900 Bal. 4,000Credit Sales 98,000 Write-offs 900 Bad debt expense 980Bal. 50,100 Bal. 4,080 Net accounts receivable: $50,100 – $4,080 = $46,020. Teck Automotive expects to collect the net accounts receivable of $46,020.


(15-20 min.) E 7-35B

Req. 1

Journal


2014 Oct. 31 Bad debt expense ($11,085 - $4,200) 6,885 Allowance for uncollectible accounts 6,885 Record estimate of uncollectible accounts for the year.

Computations:

Balance needed in allowance account: ($125,000 .003) + ($80,000 .04) + ($61,000 .06) + ($7,000 .55) = $375 + $3,200 + $3,660 + $3,850 = $11,085. Adjusting entry amount: $11,085 balance needed – $4,200 current balance = $6,885.

Allowance for uncollectible accounts Bal. 4,200 Bad debt expense 6,885 Bal. 11,085

Req. 2

Journal


2014 Oct. 31 Bad debt expense ($11,085 + $1,300) 12,385 Allowance for Uncollectible Accounts 12,385 Record estimate of uncollectible accounts for the year.

Computations:

Balance needed in allowance account: ($125,000 .003) + ($80,000 .04) + ($61,000 .06) + ($7,000 .55) = $375 + $3,200 + $3,660 + $3,850 = $11,085. Adjusting entry amount: $11,085 balance needed + $1,300 current balance = $12,385.

Allowance for Uncollectible Accounts Bal. 1,300 Bad debt expense 12,385 Bal. 11,085


(15-20 min.) E7 -36B Req 1

Journal


2014 Dec 31 Bad debt expense 6,000 Allowance for uncollectible accounts 6,000 Record estimate of uncollectible accounts for the year. Computations: ($800,000 .0075) = $6,000 Req 2

Journal


2014 Dec. 31 Bad debt expense 1,350 Allowance for uncollectible accounts 1,350 Record estimate of uncollectible accounts for the year. Computations: Balance needed in allowance account: $2,650 Adjusting entry amount: $2,650 balance needed - $1,300 current balance = $1,350 (15-20 min.) E 7-37B

Req. 1

Interest for: 2014: $475,000 .06 5/12 = $11,875 2015: $475,000 .06 7/12 = $16,625

Req. 2

a. Texas State Bank has a note receivable. b. Gina Baldwin has a note payable. c. Texas State has interest revenue. d. Gina Baldwin has interest expense.


Req. 3 Payoff at January 31, 2015: Principal $475,000 Interest $475,000 .06 6/12 = 14,250 Total $489,250

(15-20 min.) E 7-38B

Journal


May 1 Note receivable—S. Franklin 16,000 Cash 16,000 Record loan supported by note. Sep 17 Note receivable—Findlay Corp. 12,000 Sales revenue 12,000 Record sales revenue provided for note receivable. 30 Interest receivable ($405 + $43) 448 Interest revenue 448 Accrue interest revenue. Computations: Interest Receivable: S. Franklin: $16,000 0.06 152/360 = $405 Findlay Corp: $12,000 0.10 13/360 = 43 Total interest receivable at September 30 $ 448


(15-20 min.) E 7-39B Req. 1

Journal


2014 Jan 31 Accounts receivable—Jitterz Coffee 12,000 Sales revenue 12,000 Record sale on account. Jun 1 Note receivable—Jitterz Coffee 12,000 Accounts receivable—Jitterz Coffee 12,000 Record note received for account. Jul 31 Cash ($12,000 + $140) 12,140 Note receivable— Jitterz Coffee 12,000 Interest revenue ($12,000 .07 x 60/360) 140 Record collection of note receivable. (15-20 min.) E 7-40B Req 1 A B C D Cash $ 95,000 $ 67,000 $20,000 $103,000 Short-term investments 85,000 30,000 14,000 53,000 Net receivables 120,000 113,000 50,000 145,000 =Total quick assets $300,000 $210,000 $84,000 $301,000 ÷ Current liabilities $200,000 $255,000 $60,000 $260,000 Quick ratio 1.50 0.82 1.40 1.16

Req 2 Total current assets $325,000 $224,000 $96,000 $368,000 ÷ Current liabilities $200,000 $255,000 $60,000 $260,000 = Current ratio 1.63 0 .88 1.60 1.42 Req 3 Company B should be concerned because they only have $0.82 of quick assets and $0.88 of current assets to pay for every $1 owed in current liabilities.


(15-20 min.) E 7-41B Requirement 1 Dollar amounts in thousands Accounts Short-term a. Quick

= Cash + receivable + investments

ratio Total Current Liabilities

= $130+ $280 + $95

$360 + $25

= $505

$385 = 1.31

b. Current =

Cash + Acct. Rec. + Investments + Inventory + Other current assets ratio Total current liabilities

= $130+ $280 + $95 + 145 + 65

$360 + $25

= $715

$385 = 1.86

c. Accounts Receivable

= Net credit sales

= $3,270

Turnover Average net accounts receivable [($280 + $260) / 2] = 12.1 times per year Requirement 2

a. A quick ratio of 1.31 is strong because there is $1.31 of quick assets for every $1 of current liabilities owed.

b. A current ratio of 1.86 is strong because there is $1.86 of current assets for every $1 of current liabilities.

c. An accounts receivable turnover ratio of 12.1 is good relative to credit terms of net 30.


Problems

(20-25 min.) P7-50B Req. 1

Julio’s Hamburgers

Bank Reconciliation

October 31

Bank Book

Balance, October31 $12,555 Balance, October 31 $12,071

Add: Add:

Deposit in transit 400 EFT— collection of rent revenue 850

Correction of bank error— EFT - Bank collection oon account 225

Charged our account

for the check of

another company 745 Interest revenue on bank balance 8

13,700 13,154

Less:

Outstanding checks

No. 800 323

No. 802 81

No. 806 27 Less:

No. 809 147 NSF check #698 72

No. 810 215 NSF check #701 186

No. 811 46 Service charge 35



Req. 2

Journal


Oct 31 Cash 850 Rent revenue 850 Record EFT rent collected by bank 31 Cash 225 Accounts receivable 225 Record EFT collection from customer. 31 Cash 8 Interest revenue 8 Record interest earned 31 Accounts receivable ($72 + $186) 258 Cash 258 Record NSF checks returned by the bank. 31 Miscellaneous expense 35 Cash 35 Record bank service charge.


(20-25 min.) P 7-51B Req. 1

Journal

DATE ACCOUNTS AND EXPLANATIONS

POST

REF. Dr. Cr. Apr 30 Accounts receivable 510,000 Sales revenue 510,000 Record sales on account. 30 Cash 525,000 Accounts receivable 525,000 Record collections on account. 30 Allowance for uncollectible accounts 5,000 Accounts receivable 5,000 Write off uncollectible accounts. 30 Bad debt expense (510,000 .04) 20,400 Allowance for uncollectible accounts 20,400 Record estimate of uncollectible expense for the

month.

Accounts receivable Allowance for uncollectible accounts Bal. 210,000 Collections 525,000 Bal. 6,300Credit sales

510,000 Write-offs 5,000 Write-offs

5,000 Bad debt expense 20,400

Bal. 190,000 Bal. 21,700

Bad debt expense Bad debt expense

20,400

Bal. 20,400


Req 2.

Journal


April. 30 Accounts receivable 510,000 Sales revenue 510,000 Record sales on account. 30 Cash 525,000 Accounts receivable 525,000 Record collections on account. 30 Bad debt expense 5,000 Accounts receivable 5,000 Write off uncollectible accounts.

Accounts receivable Bad debt expense

Bal. 210,000 Collections 525,000 Write-offs 5,000 Credit sales 510,000

Write-offs 5,000

Bal. 5,000

Bal. 190,000

Req. 3

Income statement:

Allowance Method

Direct Write- Off Method

Bad debt expense $20,400 $5,000 Bad debt expense under the allowance method better matches expense with revenue because it is recorded in the same period sales are made. The expense measured by the direct write-off method is not related to revenue in any systematic way.

Req. 4

Balance sheet:

Allowance Method

Direct Write- Off Method

Accounts receivable $190,000 $190,000 Less: Allowance for uncollectible accounts 21,700 — Accounts receivable, net $168,300 $190,000 Net accounts receivable under the allowance method is more realistic because it shows the amount of the receivables that the company expects to collect. The net receivable measured by the direct write-off method is unrealistic because the company knows that it will fail to collect from some customers.


(15-20 min.) P 7-52B

Req. 1 Allowance for uncollectible accounts Bad debts expense

Bal. 1,400 Bal. 0 Write-off 800 Reinstate 800 adjustment 2,332 Write-off 552 adjustment 2,332 Bal. 2014 3,180 2,332 Req. 2

Journal


2014 Jan. 17 Accounts receivable—Jon Nelson 800 Sales revenue 800 Record sale on account. June 29 Allowance for uncollectible accounts 800 Accounts receivable— Jon Nelson 800 Write off uncollectible account. Aug. 6 Accounts receivable— Jon Nelson 800 Allowance for uncollectible accounts 800 Reinstate account receivable. 6 Cash 650 Accounts receivable— Jon Nelson 650 Record partial collection on account. Sept. 4 Cash ($800 – $650) 150 Accounts receivable—Jon Nelson 150 Record balance collected on account. Dec. 31 Allowance for uncollectible accounts 552 Accounts receivable—Bill Renz 175 Accounts receivable—Nancy Carlson 240 Accounts receivable—Daria Putin 137 Write off uncollectible accounts. 31 Bad debt expense 2,332 Allowance for uncollectible accounts 2,332 Record estimate of uncollectible accounts for the year. Req. 3


Balance sheet at December 31, 2014: Current assets: Accounts receivable $87,550 Less: Allowance for uncollectible accounts 3,180 Accounts receivable, net $84,370 (20-25 min.) P 7-53B Req. 1 Note Due Date Principal + Interest = Maturity Value (1) Nov 5, 2015 $20,000 + $1,800 ($20,000 .09 1) = $21,800 (2) Aug 30, 2015 6,000 + $585 ($6,000 .13 9/12) = 6,585 (3) Feb 5, 2015 12,000 + $220 ($12,000 .11 60/360) = 12,220

Req. 2

Journal


2014 Dec 31 Interest receivable 435 Interest revenue 435 Computations: Note (1): $20,000 .09 56/360 = $280 Note (2): $6,000 .13 31/360 = 67 Note (3): $12,000 .11 24/360 = 88 Total interest revenue = $435


Req. 3

Journal


2015 Nov 5 Cash ($20,000 + $280 + $1,520) 21,800 Note receivable 20,000 Interest receivable ($20,000 .09 56/360) 280 Interest revenue ($20,000 .09 304/360) 1,520 (20-25 min.) P 7-54B Req. 1

Journal


2013 Dec. 6 Note receivable—LM Publishing 6,000 Accounts receivable—LM Publishing 6,000 31 Interest receivable ($6,000 .08 25/360) 33 Interest revenue 33 31 Interest revenue 33 Retained earnings 33

2014 Mar 5 Cash ($6,000 + $33 + $87) 6,120 Note receivable—LM Publishing 6,000 Interest receivable($6,000 .08 25/360) 33 Interest revenue ($6,000 .08 65/360) 87 June 1 Note receivable—London Sounds 12,500 Cash 12,500 Oct. 31 Note receivable—Union Music 4,000 Accounts receivable—Union Music 4,000 Dec. 1 Cash ($12,500+ $438) 12,938 Note receivable— London Sounds 12,500 Interest revenue ($12,500 .07 6/12) 438


(20-25 min.) P 7-55B Dollar amounts in thousands 2014 2013 Cash + Net current receivables a. Quick

= + ST investments

=$190 + $250 + $118 $106 + $290 + $120

Ratio Total current liabilities $650 $675 = 0.86 = 0.76

b. Current

= Total current assets

=$1,023 $1,006

Ratio Total current liabilities $650 $675 = 1.57 = 1.49

c. A/R

= Net sales

=$5,184

= 19.20 $5,050

= 16.83Turnover Average A/R* $270 $300 *(beginning A/R + ending A/R)/2

d. Receivable collection

period =

Average accounts receivable=

$270 $300 (Sales/365 Days) $5,184/365 $5,050/365

= 19.01 = 21.68


Req. 2

MEMORANDUM DATE: TO: The Lakeland Restaurants FROM: Student Name RE: Changes in ratio values from 2013 to 2014 The quick ratio increased from 0.76 to 0.86 and the current ratio increased from 1.49 to 1.57. These increases were largely due to the significant increase in Cash. This conveys a favorable impression about the company as it indicates the company has more of an ability to pay its current liabilities as they come due. The accounts receivable turnover increased from 16.83 to 19.20 and the receivable collection period decreased from 21.68 to 19.01. Both changes were favorable and can be attributed to the decrease in Accounts receivable. This conveys a favorable impression about the company as it indicates that the business appears to have a better ability collecting cash from credit customers. Student responses may vary.


Appendix:

Short Exercises

(5-10 min.) S 7A-2

Journal


Sept. 1 Petty cash 250 Cash 250 30 Office supplies expense 112 Entertainment expense 75 Cash short and over 7 Cash 194 30 Petty cash 50 Cash 50

Exercises

(10-15 min.) E 7A-6B

Journal


Dec 31 Office supplies expense 121 Delivery expense 55 Cash short and over 12 Cash 188 Replenish the petty cash fund. 31 Petty cash 80 Cash 80 Increase Petty Cash fund by $80 to $280


Problems

(10-15 min.) P 7A-8B Req. 1

Journal


Aug 1 Petty cash 450 Cash 450 Open the petty cash fund. Req. 2

Journal


Aug 31 Office supplies expense 92 Travel expense 29 Delivery expense 15 Entertainment expense 70 Cash short and over 35 Cash 241 Replenish the petty cash fund. A difference of $35 charged to the cash short and over account is approaching an amount that is significant. A review of the internal controls supporting the petty cash fund should be performed to prevent the custodian from taking cash for personal use. Req. 3

Journal


Sep 1 Cash ($450 − $400) 50 Petty cash 50 Decrease the petty cash fund from $450 to $400. The custodian takes $50 currency and coin from the fund and deposits it in the bank.


Chapter 8: Analyzing and Recording Business Transactions

Short Exercises

(5-10 min.) S 8-2

A 1. Franchises

NA 2. Land

DR 3. Buildings

DR 4. Furniture

A 5. Patents

A 6. Copyrights

A 7. Trademarks

DR 8. Land improvements

DL 9. Gold ore deposits

(5-10 min.) S 8-3

L 1. Survey fees

LI 2. Fencing

LI 3. Lighting

L 4. Clearing land

LI 5. Parking lot

(5-10 min.) S 8-4

Journal


Land 75,000 Building 60,000 Equipment 15,000 Notes Payable 175,000 Record purchase of land, a building, and

equipment.


Computations:

Asset

Market

Value Percentage of Total Market Value

Total Purchase

Price

Cost of Each Asset

Land $ 110,000 $110,000 / $220,000 = 50% X $210,000 = $ 105,000

Building 88,000 $88,000 / $220,000 = 40% X $210,000 = 84,000

Equipment 22,000 $22,000 / $220,000 = 10% X $210,000 = 21,000

Total $220,000 100% $210,000


(5-10 min.) S 8-5

Req 1.

Journal


Incorrect entry: Equipment 3,000 Cash 3,000 Correct entry: Repairs and Maintenance Expense 3,000 Cash 3,000

Req 2.

Net income would be overstated by $3,000, because the 3,000 was not included as an expense.

(10-15 min.) S 8-6

Depreciation is the process of allocating a plant asset’s cost to expense over its useful life.

The primary purpose of depreciation is to match the period’s expenses against its revenues in

order to measure net income.

Lake is correct that depreciation can relate to the wear and tear of an asset. However, the

depreciation of some assets is more affected by obsolescence than by physical wear and tear.

Coe is wrong. Depreciation has nothing to do with a cash fund to replace an asset.


(10-15 min.) S 8-7

Requirement 1

First-year depreciation:

a. Straight-line: ($48,000 – $8,000) / 4 years = $10,000 b. Units-of-production: [($48,000– $8,000) / 800,000 miles] 160,000 miles = $8,000 c. Double-declining-balance: (1/4 years) 2 = 50%; 50% x $48,000

= $24,000 Requirement 2 Book value, under straight-line method: Cost $48,000 Less: Accumulated depreciation (10,000) Book value $38,000


(10-15 min.) S 8-8

Second-year depreciation: a. Straight-line: ($48,000 – $8,000) / 4 years = $ 10,000 b. Units-of-production: [($48,000 – $8,000) /800,000 miles] 280,000 miles = $14,000 c. Double-declining-balance:

Year 1: 50% x $48,000= $24,000 Year 2: 50% x ($48,000 – $24,000) = $12,000

(5-10 min.) S 8-9

First-year depreciation (for a partial year):

Straight-line: ($52,000 – $10,000) / 5 years 9/12 = $6,300


(5-10 min.) S 8-10

Journal


Depreciation Expense, Hot Dog Stand 18,000 Accumulated Depreciation, Hot Dog Stand 18,000 Record depreciation on hot dog stand.

Computations:

Straight-line for years 1-4: $120,000 / 10 years = $12,000 per year

$12,000 4 years = $48,000 for years 1-4

Revised Straight-line: ($120,000 - $48,000)/4 years = $18,000 per year

(10-15 min.) S 8-11

CAP a. Purchase price REV b. Ordinary recurring repairs CAP c. Lubrication before machine is placed in service REV d. Periodic lubrication CAP e. Major overhaul CAP f. Sales tax CAP g. Transportation and insurance CAP h. Installation CAP i. Training of personnel


(5-10 min.) S 8-12

Journal

DATE ACCOUNTS

POST REF. Dr. Cr.

2014 Dec. 31 Cash 42,000 Accumulated Depreciation, Truck 27,000 Truck 64,000 Gain on Sale of Truck 5,000 Record the sale of the truck.

Computations:

Sale price of asset $42,000 Book value: Truck $64,000 Less: Accumulated depreciation (27,000) 37,000 Gain on sale $5,000


(15-20 min.) S 8-13

Purchase price paid for the Thrifty Nickel $925,000Market value of the Thrifty Nickel’s assets $1,225,000 Less: Market value of the Thrifty Nickel’s liabilities (375,000)

Market value of the Thrifty Nickel’s net assets 850,000

Goodwill $75,000

Journal


Assets 1,225,000 Goodwill 75,000 Liabilities 375,000 Cash 925,000 Record purchase of The Thrifty Nickel.

(5-10 min.) S 8-14

Journal


Apr 1 Patent 750,000 Cash 750,000 Record purchase of patent. Dec 31 Amortization Expense 112,500 Patent 112,500 Record amortization expense

Computations:

$750,000/5 = $150,000 x 9/12 = $112,500


(5-10 min.) S 8-15

Depletion expense per barrel of oil = $14,400,000/1,200,000 = $12.00

Journal


2015 Dec. 31 Depletion Expense, Oil Reserves (220,000 x

$12.00)

2,640,000 Accumulated Depletion, Oil Reserves 2,640,000 Record depletion.

(5-10 min.) S 8-16

__H_ 1. A bond that management plans on owning until it is repaid. Management does not

believe it will need to sell the bond to generate cash before the bond’s scheduled

maturity date.

__N_ 2. Land that management is holding as an investment.

__T_ 3. Intel stock that company management plans on selling quickly, as soon as its price

is 10% more than what the company paid at the time it purchased the stock.

__A_ 4. Ford Motor Company stock. Management does not actively manage this stock and

intends to sell it only if they need to generate cash.

__A_ 5. A bond that management plans on owning until it is repaid. However,

management believes it may have to sell the bond within the year in order to

provide enough cash for operations.

__N_ 6. Inventory that management intends to sell within the year.


(5-10 min.) S 8-17

1 IS $1432 BS $5,0003 IS $604 BS $9404 SE $655 BS $6555 IS $156 IS $280


Exercises

(10-15 min.) E 8-32B

Req 1

Cost of land: $65,000 + 235,000 + $6,300 + $2,800 + $5,500 = $314,600

Cost of building: $840,000

Cost of land improvements: $36,000 + $16,700 + $7,100 = $59,800

Req 2

Specialty Systems will depreciate the building and the land improvements.

(10-15 min.) E 8-33B

Req. 1

Cost of building in 2015: Construction cost $940,000 Architect fees and building permits 78,000 Total $1,018,000


Req. 2

Journal


Building 940,000 Cash 940,000 Incurred construction cost. Building 78,000 Cash 78,000 Paid architect fees and building permit fees.

(10-15 min.) E 8-34B

Journal


Tanning Bed 1 8,211

Tanning Bed 2 5,481

Tanning Bed 3 7,308

Cash 11,000

Notes Payable 10,000

Record purchase of 3 tanning beds.


Computations:

Tanning Bed Appraised

Value

Percentage of Total Appraised ValueTotal Purchase

Price Cost of Each

Bed

1

$ 9,000

$9,000 / $23,000 = .391 $21,000

=

$ 8,211

2

6,000

$6,000 / $23,000 = .261 x $21,000

=

5,481

3

8,000

$8,000 / $23,000 = .348 x $21,000

=

7,308

Totals

$23,000 1.000

$21,000


(15-20 min.) E 8-35B

Reds. 1 and 2

Year

Cost - Accumulated depreciation = Equipment, net* Net income

1 $470,000 $94,000 $376,000 U $ 376,000U**

2 $470,000 $188,000 $282,000 U $ 94,000 O

3 $470,000 $282,000 $188,000 U $ 94,000 O

4 $470,000 $376,000 $94,000 U $ 94,000 O

5 $470,000 $470,000 Correct $ 94,000 O

U = Understated O = Overstated

Computations:

Straight-line: ($470,000)/ 5 years = $94,000 per year.

*Equipment, net represents the net amount that should have appeared on the balance sheet for each year. Since no asset amount was recorded for this purchase, this represents the amount of the understatement.

**$470,000 expense recorded - $94,000 depreciation expense that should have been recorded = $376,000 understatement of net income.


(15-20 min.) E 8-36B

Req. 1

DEPRECIATION EXPENSE PER YEAR

Year

Straight-Line

Units-of-Production Double-Declining-Balance

2014 $ 9,000 $ 4,050 $ 19,000

2015 9,000 11,250 9,500

2016 9,000 10,800 3,750

2017 9,000 9,900 3,750

$36,000 $36,000 $36,000

Computations: Straight-line: ($38,000 – $2,000)/ 4 years = $9,000 per year.

Units-of-production: ($38,000 – $2,000)/ 800 operations = $45 per operation

Year 1: 90 operations $45 = $4,050

Year 2: 250 operations $45 = $11,250

Year 3: 240 operations $45 = $10,800

Year 4: 220 operations $45 = $9,900

Double-declining-balance: (1/4 years) 2 = 50%

Year 1: 50% x $38,000 = $19,000

Year 2: 50% x ($38,000 – $19,000) = $9,500

Years 3 and 4: ($38,000 – $19,000 – $9,500) = $9,500 – $2,000 residual value = $7,500/ 2 years = $3,750.

Req. 2

The units-of-production method tracks the wear and tear on the equipment most closely.

Req. 3

For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation expense and thus the largest tax deductions in the early life of the asset. This conserves cash in the early years.


(10-15 min.) E 8-37B

Journal

DATE

ACCOUNT

Dr.

Cr.

Year 15 Depreciation Expense, Building 29,000

Accumulated Depreciation, Building 29,000

Record depreciation on building.

Year 16 Depreciation Expense, Building 72,000

Accumulated Depreciation, Building 72,000

Record depreciation on building.

Computations:

Straight-line: ($1,000,000 – $130,000)/ 30 years = $29,000

Straight-line for years 1-15: $ 29,000 15 years = $435,000

Revised SL =

$1,000,000 - $435,000 - $205,000= $72,000 per year

depreciation 5 years


(15-20 min.) E 8-38B

Journal


2015

August 31 Depreciation Expense, Fixtures

1,250

Accumulated Depreciation, Fixtures 1,250

Record 8 months’ depreciation.

31 Cash

13,200 Accumulated Depreciation, Fixtures 3,750

Loss on Sale of Fixtures

1,050

Fixtures

18,000

Record the sale of fixtures.

Computations:

Straight-line, 2015: ($18,000/ 8 years) = $2,250 x 8/12 months = $1,500

Sale price of old fixtures $13,200 Fixtures: Cost $18,000

Less: Accumulated depreciation ($2,250 + $1,500) (3,750) Book value (14,250)

Loss on sale ($1,050)


(10-15 min.) E 8-39B

Journal


2014

Jan. 2 Cash

252,000

Accumulated Depreciation, Plant, and Equipment

87,500

Plant, and Equipment

322,500

Gain on Sale of Assets

17,000

Sale price of assets $252,000 Book value: Plant, and Equipment: $645,000/2= $322,500 Less: Accumulated Depreciation: $175,000/2 = (87,500) 235,000 Gain on sale $17,000


(15-20 min.) E 8-40B

Journal


2016

Truck - new

422,000

Accumulated Depreciation, Truck – old *

152,200

Truck - old

385,000

Cash (422,000 - $243,000)

179,000

Gain on Exchange **

10,200

* Units-of-production: ($385,000 – $85,000)/ 1,500,000 miles = $.20 per mile

Year 1: 182,000 miles $.20 = $36,400

Year 2: 263,000 miles $.20 = $52,600

Year 3: 254,000 miles $.20 = $50,800

Year 4: 62,000 miles $.20 = $12,400

Total $152,200

** Trade-in value $243,000 Book value of old truck: Cost $385,000 Less: Accumulated Depreciation: (152,200) 232,800 Gain on sale $10,200


(10-15 min.) E 8-41B

Journal


Part 1(a) Patents

700,000

Cash

700,000

Record purchase of patent.

(b) Amortization Expense, Patents ($700,000/ 8 years)

87,500

Patents

87,500

Record amortization of patent.

Part 2 Amortization Expense, Patents

131,250

Patents

131,250

Record amortization of patent.

Computations:

Straight-line for years 1-4: $ 87,500 5 years = $437,500

Revised SL =

$700,000 - $437,500 =

$131,250 per year amortization 2 years


(10-15 min.) E 8-42B

Req. 1 Goodwill:

Purchase price paid for Simmons, Inc

$16,000,000

Market value of Simmons, Inc.’s assets $22,000,000

Less: Market value of Simmons, Inc.’s liabilities

(8,000,000)

Market value of Simmons, Inc.’s net assets

14,000,000

Goodwill

$ 2,000,000

Req. 2

Journal


Assets ( Cash, Receivables, Plant assets, etc.) 22,000,000 Goodwill 2,000,000 Liabilities 8,000,000 Cash 16,000,000 Purchased Simmons, Inc.


(10-15 min.) E 8-43B

Journal


(a) Mineral Assets 615,000 Cash 615,000 Purchased mineral assets. (b) Mineral Assets ($1,400 + $3600 + $45,000) 50,000 Cash 50,000 Paid fees and other costs related to mineral assets. (c) Depletion Expense [($665,000/500,000) 80,000] 106,400 Accumulated Depletion, Mineral Assets 106,400 Record depletion.

(10-15 min.) E 8-44B

Requirement 1

Balance Sheet (partial):

Property, Plant, and Equipment $12,000,000

Less: Accumulated Depreciation, Plant and Equipment 3,000,000

Net Property, Plant, and Equipment $9,000,000

Patents 210,000

Goodwill 1,400,000

Other Long-term Assets 318,000

Total Long-term Assets $10,928,000

Requirement 2

The book value of property, plant, and equipment on December 31, 2014 was $9,000,000.


(5-10 min.) E 8-45B

Return on Assets

= Net income

= $63,000

= 14.93%Average total assets ($408,000 + $436,000)/2

Fixed asset turnover ratio

= Sales

= $821,000

= 2.65 Average fixed assets ($305,000 + $314,000)/2


Problems

(20-25 min.) P 8-54B

Journal


Jan. 1 Motor-Carrier Equipment (new) 174,000

Accumulated Depreciation, Motor-Carrier Equipment

85,000 Motor-Carrier Equipment (old) 132,000 Cash ($174,000 – $64,000) 110,000 Gain on Exchange of Equipment 17,000 Record trade of motor-carrier equipment. July 1 Depreciation Expense, Building 6,125 Accumulated Depreciation, Building 6,125 Record 6 months’ depreciation.

1 Cash 100,000 Note Receivable 590,000

Accumulated Depreciation, Building ($240,000 + $6,125)

246,125 Building 570,000 Gain on Sale of Building 366,125 Record sale of building. Oct. 31 Land 288,000 Building 612,000 Cash 900,000 Record purchase of land and a building. Dec. 31 Depreciation Expense, Motor-Carrier Equipment 19,000

Accumulated Depreciation, Motor-Carrier Equipment 19,000 Record depreciation on motor-carrier equipment. 31 Depreciation Expense, Buildings 2,300 Accumulated Depreciation, Buildings 2,300 Record depreciation on building.


Computations:

Trade-in Value of Motor carrier equipment: = $64,000 Book value: Motor carrier equipment $132,000 Less: Accumulated depreciation (85,000) 47,000 Gain on exchange $17,000

Straight-line, building: ($570,000 – $80,000)/ 40 years x 6/12 months = $6,125

Sale price of building: $100,000 + $590,000 = $690,000 Book value: Building $570,000 Less: Accumulated depreciation (246,125) 323,875 Gain on sale $366,125

Asset

Market Value

Percentage of Total Market Value

Total Purchase

Price

Cost of Each Asset

Land. $ 331,200 $331,200 / $1,035,000 = 32% X $900,000 = $288,000 Building 703,800 $703,800 / $1,035,000 = 68% X $900,000 = $612,000 Total $1,035,000 100% = $900,000

Units-of-production, motor-carrier equipment: [($174,000 – $22,000) /800,000 miles] 100,000 miles = $19,000

Straight-line, building: ($612,000 - $60,000)/40 years x 2/12 months = $2,300.


(20-25 min.) P 8-55B

Req. 1

Straight-Line Depreciation Schedule Depreciation for the Year

DATE

ASSET COST

DEPRECIATION RATE

DEPRECIABLE COST =

DEPRECIATION

EXPENSE

ACCUMULATED DEPRECIATION

BOOK

VALUE Year 0

$320,000

$320,000

Year 1

1/5

$280,000 $ 56,000

$ 56,000

264,000

Year 2

1/5

280,000

56,000

112,000

208,000

Year 3

1/5

280,000

56,000

168,000

152,000

Year 4

1/5

280,000

56,000

224,000

96,000

Year 5

1/5

280,000

56,000

280,000

40,000

Computations: Asset cost: $287,700 + $2,800 + $800 + $25,800 + $2,900 = $320,000 Straight-line: ($320,000 – $40,000) / 5 years = $56,000


Units-of-Production Depreciation Schedule

Depreciation for the Year

DATE

ASSET COST

DEPRECIATION PER UNIT

NUMBER

OF UNITS =

DEPRECIATION

EXPENSE


BOOK

VALUE Year 0

$320,000

$320,000

Year 1

$1.12

60,000

$ 67,200

$ 67,200

252,800

Year 2

1.12

55,000

61,600

128,800

191,200

Year 3

1.12

50,000

56,000

184,800

135,200

Year 4

1.12

45,000

50,400

235,200

84,800

Year 5

1.12

40,000

44,800

280,000

40,000

Computations: Units-of-production: ($320,000 – $40,000) / 250,000 units = $1.12/unit


Double-Declining-Balance Depreciation Schedule Depreciation for the Year

DATE

ASSET COST

DDB DEPRECIATION RATE

BOOK

VALUE =

DEPRECIATION

EXPENSE


BOOK

VALUE

Year 0

$320,000

$320,000

Year 1

.40

$320,000

$ 128,000

$ 128,000

192,000

Year 2

.40

192,000

76,800

204,800

115,200

Year 3

.40

115,200

46,080

250,880

69,120

Year 4

.40

69,120

27,648

278,528

41,472

Year 5

41,472

1,472

280,000

40,000

Computations: DDB rate: (1/5 years 2) =.40 Depreciation for Year 5: $41,472 – residual value of $40,000 = $1,472

536 Solutions Manual Copyright © 2015 Pearson Education, Inc

Req. 2

The depreciation method that reports the highest net income in the first year of the equipment’s

life is the straight-line method, which produces the lowest depreciation expense for that year,

$56,000. The method that minimizes income taxes in the first year is the double-declining-

balance method, which produces the highest depreciation expense amount for that year,

$128,000.

Req. 3

Method of depreciation

Straight-line Units of Production Declining Balance

Cost $320,000 $320,000 $320,000

Less: Accumulated

Depreciation

(56,000) (67,200) (128,000)

Book value at Dec. 31 $264,000 $252,800 $192,000

Copyright © 2015 Pearson Education, Inc. Kemp Waybright Financial Accounting 3e 537

(15-20 min.) P 8-56B

Requirement 1

Journal


a. Accumulated Depreciation, Equipment 30,000 Loss on Disposal 1,000 Equipment 31,000 Record the disposition of equipment. b. Cash 6,000 Accumulated Depreciation, Equipment 30,000 Equipment 31,000 Gain on sale of Equipment 5,000 Record sale of equipment. c. Equipment - new 35,000 Accumulated Depreciation, Equipment 30,000 Equipment - old 31,000 Cash ($35,000 - $5,500) 29,500 Gain on Exchange of Equipment * 4,500 Record exchange of equipment. d. Equipment - new 23,000 Accumulated Depreciation, Equipment 30,000 Loss on Exchange of Equipment ** 500 Equipment - old 31,000 Note payable ($23,000 - $500) 22,500 Record exchange of equipment.

* Gain on exchange = Trade in value less book value of old equipment = $5,500 - ($31,000 - $30,000) = $4,500

** Loss on exchange = Book value of old equipment - trade in value = ($31,000 - $30,000) - $500 = $500


(15-20 min.) P 8-57B

Req. 1

Journal

DATE ACCOUNTS

POSTREF. Dr. Cr.

Assets 2,700,000 Goodwill 400,000 Liabilities 1,300,000 Cash 1,800,000 Record purchase of Corner Diners

Computations: Goodwill: Purchase price paid for Don’s Diners $1,800,000Market value of Don’s Diners’ assets $2,700,000 Less: Market value of Don’s Diners’ liabilities (1,300,000) Market value of Don’s Diners’ net assets 1,400,000Goodwill $400,000

Req. 2

Cottage Cafe should measure the fair value of its goodwill each year. If the goodwill has

increased in fair value, there is nothing to record. But if the goodwill’s fair value has decreased,

then Cottage Cafe should record an impairment loss and write down the goodwill.


(20-25 min.) P 8-58B

Req. 1

Journal


Coal Reserves 1,800,000 Cash 1,800,000 Purchased coal mine rights. Coal Reserves ($66,000 + $46,000) 112,000 Cash 112,000 Paid costs related to acquisition of mine. Coal Reserves 32,000 Note Payable 32,000 Record note for costs related to coal mine. Depletion Expense, Coal Reserves 492,480 Accumulated Depletion, Coal Reserves * 492,480 Record depletion. Accounts Receivable (38,000 $28) 1,064,000 Sales Revenue 1,064,000 Record coal sales. Operating Expenses 250,000 Cash 250,000 Paid operating expenses.

* [($1,800,000 + $66,000 + $46,000 + $32,000) / 150,000] 38,000

Req. 2 O’Brien Oil Company

Income Statement – Coal Operations For the year ended Year 1

Sales Revenue $1,064,000Depletion Expense $492,480 Operating Expenses 250,000 742,480Net Income $ 321,520


(10-15 min.) P 8-59B

Req. 1

2013

Return on Assets

= Net income

= $151,000



= Sales

=$1,582,000


2014

Return on Assets

= Net income

=$142,000



= Sales

=$1,468,000


Req 2

The return on assets has decreased from 16.61% to 15.40% indicating that Ibanez Industries is less profitable in 2014 relative to its total assets.

The fixed asset turnover ratio has decreased from 2.11 to 1.92 indicating that Ibanez Industries is generating sales less efficiently with its fixed assets in 2014.


Chapter 9: Current Liabilities and Long-Term Debt

Short Exercises

(5-10 min.) S 9-2

Dawson Co. would report the following amounts on its balance sheet at July 31, 2014:

Note payable, short-term $6,000.00

Interest payable ($6,000 x .09% x 3/12) $135.00

Dawson Co. would report the following amounts on its income statement for the year ended July 31, 2014:

Interest expense $135.00


(5-10 min.) S 9-3

1.

Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

Cash ($607,000 .35) 212,450 Notes Receivable ($607,000 – $212,450) 394,550 Sales Revenue 607000 Record sales. Warranty Expense ($607,000 .04) 24,280 Estimated Warranty Payable 24,280 Record estimated warranty expense. Estimated Warranty Payable 18,500 Cash 18,500 Record payment of warranty claims.


2.

Estimated Warranty Payable Warranty payments 18,500 Warranty expense 24,280 Bal. 5,780

At the end of the first year, Sundaze owes its customers $5,780 in estimated warranty payable

3. Sundaze will report warranty expense of $24,280 during its first year of operations.

No, the warranty expense for the year does not necessarily equal the year’s cash payments for warranties. The matching principle addresses this situation. Cash payments for warranties do not determine the amount of warranty expense for that year. Instead, the warranty expense is estimated and matched against revenue during the period of the sale, regardless of when the company pays for the warranty claims.

(5-10 min.) S 9-4

1. These are contingent liabilities because at the time the financial statements were issued;

Phatboy Motorcycles was not liable for any of these product losses. These represent

potential rather than actual obligations.

2. The contingency can become a real liability if the user of a Phatboy product suffers a loss for

which the company is responsible.


(10-15 min.) S 9-5

(5-10 min.) S 9-6

(A) (B) (C) (D)

Date Payment Interest Expense (D) x 4% x 6/12

Principal (A) - (B)

LoanBalance (D) - (C)

January 1, 2014 $280,000

June 30, 2014 $ 8,055 $ 5,600 $ 2,455 277,545

December 31, 2014 8,055 5,551 2,504 275,041

June 30, 2015 8,055 5,501 2,554 272,487

December 31, 2015 8,055 5,450 2,605 269,882

Journal


2014

a. Jan. 1 Building 360,000

Mortgage Notes Payable 360,000

Record purchase of building and issuance of mortgage note.

b. June 30 Interest Expense ($360,000 x .06 x 6/12) 10,800


Cash 13,008

Made semiannual mortgage payment.


(5-10 min.) S 9-7

1. e.

2. i.

3 d.

4. b.

5. a.

6. g.

7. h.

8. f.

9. c

(5-10 min.) S 9-8

a. Premium

b. Discount

c. Par

d. Discount

(10-15 min.) S 9-9 a. Discount

b. Premium

c. Par value

d. Premium

e. Discount


(15-20 min.) S 9-10

Journal


2014

a. Jan. 1 Cash 30,000

Bonds Payable 30,000

Issued bonds payable at par value.

b. July 1 Interest Expense ($30,000 .065 1/2) 975

Cash 975

Paid semiannual interest.

2024

c. Jan. 1 Bonds Payable 30,000

Cash 30,000

Paid bonds payable at maturity.


(15-20 min.) S 9-11

Journal


2014

a. Jan. 1 Cash 48,200

Discount on Bonds Payable ($50,000 ‐ $48,200) 1,800


Issued bonds payable at a discount.

b. July 1 Interest Expense ($2,000+ $180) 2,180

Cash ($50,000 .08 6/12) 2,000

Discount on Bonds Payable ($1,800/10) 180

Paid semiannual interest and

amortized bond discount.


(15-20 min.) S 9-12

Journal


2014

a. Jan. 1 Cash 52,420


Premium on Bonds Payable ($52,420 -

$50,000)

2,420

Issued bonds payable at a premium.

b. July 1 Interest Expense ($2,000- $242) 1,758

Premium on Bonds Payable ($2,420/10) 242

Cash ($50,000 .08 6/12) 2,000

Paid semiannual interest and

amortized bond premium.


(15-20 min.) S 9-13

Journal


2014

a. May 1 Cash 50,000



b. Nov. 1 Interest Expense ($50,000 x .08 x 6/12) 2,000

Cash 2,000

Paid semiannual interest on bonds.

c. Dec. 31 Interest Expense ($50,000 .08 2/12) 667 Interest Payable 667 Accrued two months’ interest on bonds.

(5-10 min.) S 9-14

1. LTL

2. CL

3. LTA

4. LTL

5. LTA

6. LTL

7. LTL


(5-10 min.) S 9-15

Liabilities

Current Liabilities:

Accounts payable $42,500

Interest payable 1,350

Total current liabilities 43,850

Long-term Liabilities:

Lease payable, long-term 32,000

Mortgage notes payable 180,000

Bonds payable $420,000

Less: Discount on bonds payable 14,000 406,000

Total long-term liabilities 618,000

Total liabilities $661,850


Exercises

(5-10 min.) E 9-27B

Journal


May 31 Cash ($630,000 + $44,100) 674,100

Sales Revenue 630,000

Sales Tax Payable ($630,000 .07) 44,100

Jun 6 Sales Tax Payable 44,100

Cash 44,100 (5-10 min.) E 9-28B

Journal


2014 Feb 1 Equipment 55,000 Note Payable, Short-term 55,000

Dec 31 Interest Expense ($55,000 .06 11/12) 3,025

Interest Payable 3,025

2015 Feb 1 Note Payable, Short-term 55,000 Interest Payable 3,025 Interest Expense ($55,000 .06 1/12) 275 Cash ($55,000 + $3,025 + $275) 58,300


(5-10 min.) E 9-29B Req 1

Journal


2014

Nov 1 Cash ($2,400 + $96) 2,496

Unearned Subscription Revenue 2,400

Sales Tax Payable ($2,400 .04) 96

Dec 15 Sales Tax Payable 96

Cash 96

Dec 31 Unearned Subscription Revenue 800

Subscription Revenue ($2,400 2/6) 800 Req 2 Current liabilities: Unearned subscription revenue ($2,400 – $800) $1,600


(5-10 min.) E 9-30B Req. 1

Journal


2014

Accounts Receivable 386,000

Sales Revenue 386,000

Warranty Expense ($386,000 .03) 11,580

Estimated Warranty Payable 11,580

Estimated Warranty Payable 9,420

Cash 9,420 Req. 2

Estimated Warranty Payable Beg. bal. 1,600Warranty payments 9,420 Warranty expense 11,580 End. bal. 3,760

Clayton’s Auto Repair will report $3,760 of estimated warranty payable on its balance sheet at December 31, 2014 and $11,580 of warranty expense on its income statement for the year ended December 31, 2014.


(10-15 min.) E 9-31B Req. 1

(A) (B) (C) (D)

Date Payment Interest

(D) x 8% x 6/12 Principal (A) - (B)

Loan Balance (D) - (C )

January 1, 2014

$460,000

June 30, 2014 $26,602 $18,400 $8,202 451,798

December 31, 2014 26,602 18,072 8,530 443,268

June 30, 2015 26,602 17,731 8,871 434,397

December 31, 2015 26,602 17,376 9,226 425,171

June 30, 2016 26,602 17,007 9,595 415,576

Req. 2

Journal


2014 a. Jan. 1 Warehouses 460,000


Record purchase of warehouses and issuance of mortgage note.

b. June 30 Interest Expense 18,400 Mortgage Notes Payable 8,202 Cash 26,602

Made semiannual payment on mortgage note payable.


(15-20 min.) E 9-32B

Journal


a. May 31 Cash 850,000



b. Nov 30 Interest Expense ($850,000 .06 6/12) 25,500

Cash 25,500

Paid semiannual interest.

c. Dec 31 Interest Expense ($850,000 .06 1/12) 4,250


Accrued one months’ interest.


(15-20 min.) E 9-33B

Journal


a. Jan. 1 Cash ($90,000 .95) 85,500

Discount on Bonds Payable ($90,000 - $85,500)

4,500


Issued bonds payable at a discount.

b. July 1 Interest Expense ($2,250 + 225) 2,475

Cash ($90,000 .05 6/12) 2,250

Discount on Bonds Payable ($4,500/20) 225

Paid semiannual interest and amortized bond discount.

(15-20 min.) E 9-34B Req. 1 a.

Journal


Jan. 1 Cash 475,000


July 1 Interest Expense ($475,000 .07 6/12) 16,625

Cash 16,625


b.

Journal


Jan. 1 Cash 460,000

Discount on Bonds Payable ($460,000 - $475,000) 15,000


July 1 Interest Expense ($16,625 + $750) 17,375

Cash ($475,000 .07 6/12) 16,625

Discount on Bonds Payable

($15,000/20) 750 c.

Journal


Jan. 1 Cash 493,000


Premium on Bonds Payable ($493,000 -

$475,000)

18,000

July 1 Interest Expense ($16,625 - $900) 15,725


Cash ($475,000 .07 6/12) 16,625

Req 2 The discount price of $460,000 results in the most interest expense because Peterson Machine

Tool, Inc. receives only $460,000 for the bonds and must pay back $475,000 at maturity. The

$15,000 difference represents additional interest expense to Peterson Machine Tool, Inc.


(10-15 min.) E 9-35B December 31 2014 2015 2016 Current Liabilities: Current Portion of Long-term Note Payable $700,000 $700,000 $700,000 Interest Payable 94,500 63,000 31,500Long-term Liabilities: Long-term Note Payable 1,400,000 700,000

— Computations: Interest: 2014 $2,100,000 .09 x 6/12 = $94,500 2015 $1,400,000 .09 x 6/12 = $63,000 2016 $700,000 .09 x 6/12 = $31,500

(15-20 min.) E 9-36B

Liabilities Current Liabilities: Accounts Payable $ 37,000 Salaries Payable 8,500 Interest Payable 9,000 Income Tax Payable 11,700 Notes Payable, Current Portion 22,000 Total Current Liabilities 88,200Long-term Liabilities: Notes Payable 158,000Total liabilities $246,200 Computations: Notes payable: $180,000 – $22,000 = $158,000

(15-20 min.) E 9-37B

Debt ratio

= Total liabilities

= $220,000

= .55 or 55% Total Assets $400,000

Interest

coverage ratio =

EBIT =

$73,800 = 3.95 times

Interest expense $18,700


Problems

(20-25 min.) P 9-46B Req 1 a. Sales Tax Payable ($371,000 .07) $25,970 b. Current Portion of Long-term Notes Payable $25,000 Interest Payable ($90,000 .06 x 1) 5,400 c. Note Payable, Short-term $126,000 Interest Payable ($126,000 .07 4/12) 2,940 d. Estimated Warranty Payable ($9,200+ $31,400 – $33,800) $ 6,800 e. Unearned Rent Revenue ($13,500 4/6) $ 9,000


(20-25 min.) P 9-47B

Req 1

(A) (B) (C) (D)

Date Payment Interest

(D) x 11% x 6/12 Principal (A) - (B)

Loan Balance (D) - (C)

Jan 1, 2014 $180,000

Jun 30, 2014 $ 13,077 $ 9,900 $3,177 176,823

Dec 31, 2014 13,077 9,725 3,352 173,471

Jun 30, 2015 13,077 9,541 3,536 169,935

Dec 31, 2015 13,077 9,346 3,731 166,204Req 2

Journal


2014 Jan. 1 Building 180,000 Mortgage Notes Payable 180,000

Record purchase of building and issuance of mortgage note.

June 30 Interest Expense 9,900 Mortgage Notes Payable 3,177 Cash 13,077 Made semiannual mortgage payment. Dec 1 No entry required Dec. 31 Rent Expense 12,000 Cash 12,000 Paid one month’s rent on warehouse. 31 Leased Equipment 33,000 Lease Payable 33,000 Leased 10 copiers under a capital lease. 31 Interest Expense 9,725 Mortgage Notes Payable 3,352 Cash 13,077 Made semiannual mortgage payment.


Req 3

Liabilities Long-term: Lease payable $ 33,000 Mortgage notes payable * 166,204 Total long-term liabilities $199,204

* The December 31, 2014 long-term portion of the Mortgage Payable is represented by the balance at December 31, 2015. The principal portion of the 2015 payments ($3,536 + $3,731) would be reflected as current portion of long-term debt in current liabilities at December 31, 2014.

(20-25 min.) P 9-48B

Req 1 The 8% bonds, issued when the market interest rate is 7.25%, will be priced at a premium.

Because they pay interest at a rate higher than the market rate, investors will pay a price above

maturity value to acquire them.

Req 2

The 8% bonds, issued when the market interest rate is 9.5%, will be priced at a discount.

Because they pay interest at a rate lower than the market rate, investors will pay less than

maturity value to acquire them.


Req 3

Journal


2014 a. Mar 1 Cash 924,000 Bonds Payable 900,000

Premium on Bonds Payable ($924,000

- $900,000)

24,000 Issued bonds payable at a premium. b. Aug 31 Interest Expense ($36,000 - $1,200) 34,800 Premium on Bonds Payable ($24,000/20) 1,200 Cash ($900,000 .08 6/12) 36,000

Paid semiannual interest and amortized bond premium.

c. Sep 30 Interest Expense ($6,000- $200) 5,800 Premium on Bonds Payable ($24,000/20 x 1/6) 200

Interest Payable ($900,000 .08 1/12)

6,000

Accrued one months’ interest and amortized bond premium.

2015 d. Feb 28 Interest Payable($900,000 .08 1/12) 6,000 Interest Expense ($36,000-6,000 - $1,000) 29,000 Premium on Bonds Payable ($24,000/20 x 5/6) 1,000 Cash ($900,000 .08 6/12) 36,000

Record five months’ interest, amortized bond premium, and paid semiannual interest.


(20-25 min.) P 9-49B Req 1 a. The Meadows Golf Course’s bonds are priced at 106% ($477,000/$450,000).

b. When The Meadows Golf Course issued its bonds, the market interest rate was lower than 6%.

c. The amount of bond discount or premium is $27,000 premium.

Req 2

Journal


2014

Jan. 1 Cash 477,000


Premium on Bonds Payable 27,000

Jun 30 Interest Expense ($13,500 - $900) 12,600


Cash ($450,000 .06 6/12) 13,500

Dec 31 Interest Expense ($13,500 - $900) 12,600


Cash ($450,000 .06 6/12) 13,500

Req 3

Bonds Payable $450,000 Premium on Bonds Payable ($27,000 - $900 - $900) 25,200 Amount reported on the balance sheet at December 31, 2014 $475,200


(15-20 min.) P 9-50B

Romero, Corp.

Balance Sheet (Partial)

December 31, 2014

Current Liabilities:

Accounts Payable $23,450

Salaries Payable 7,350


Income Tax Payable 18,840

Mortgage Note Payable, Current Portion 16,500

Total Current Liabilities $75,940

Long‐term Liabilities:

Mortgage Note Payable, Long‐term 126,000

Bonds Payable $235,000

Less: Discount on Bonds Payable 12,000 223,000

Total Long‐term Liabilities 349,000

Total Liabilities $424,940


(15-20 min.) P 9-51B

Req 1

Debt ratio

= Total Liabilities

= $234,000

= .72 or 72% Total Assets $325,000

Interest

coverage ratio =

EBIT =

$27,800 = 1.49

Interest Expense $18,700

Req 2

28% (100% - 72%) of Quinn’s assets belong to the stockholders.

Req 3

Based on the debt ratio and the interest coverage ratio, most people would not be willing to lend Quinn money because the total debt is 72% of total assets and the EBIT is only 1.49 times the interest expense.


Chapter 10: Corporations: Paid-In Capital and Retained Earnings

Short Exercises

(5-10 min.) S 10-2

1. No, the excess amount of $1,500,000 was not a profit to Sullivan. No, the excess did not

affect net income. The $1,500,000 was additional paid-in capital, called Paid-in capital in

excess of par.

2. No, a change in the par value of the company’s stock doesn’t affect total paid-in capital. The

issue price of the stock affects total paid-in capital. The higher the issue price of the stock,

the higher the paid-in capital, and vice versa.

(10-15 min.) S 10-3 Case A – Issue stock and buy the assets in separate transactions:

Journal


Cash 600,000

Common Stock (10,000 shares $10) 100,000

Paid-in Capital in Excess of par--Common

($600,000 - $100,000)

500,000

Issued common stock

Building 475,000

Equipment 125,000

Cash 600,000

Purchased plant assets.


Case B – Issue stock to acquire the assets:

Journal


Building 475,000

Equipment 125,000

Common stock (10,000 Shares $10) 100,000

Paid-in capital in excess of par--Common

($600,000 - $100,000)

500,000

Issued stock to purchase plant assets.

The balances in all accounts are the same:

Building $475,000Equipment 125,000Common stock 100,000Paid-in capital in excess of par--Common 500,000

(5-10 min.) S 10-4

Journal


1. Cash ($1,200,000+ $425,000) 1,625,000

Common stock 1,200,000

Paid-in capital in excess of par--Common 425,000

Issued common stock.

2. Buckeye, Inc.’s main source of stockholders’ equity was profitable operations, as shown by the far greater amount of Retained earnings compared to paid-in capital.


(5-10 min.) S 10-5

1. Common stock, December 31, 2014 $ 900,000

Common stock, December 31, 2013 897,750

Increase during 2014 $ 2,250

Paid-in capital in excess of par--Common, December 31, 2014 $395,500

Paid-in capital in excess of par--Common, December 31, 2013 362,000

Increase during 2014 33,500

Total increase in paid-in capital during 2014 $35,750

Sugarland must have issued common stock during 2014, as shown by the increase in the Common

stock account and Paid-in capital in excess of par--Common account. Also, the number of shares

issued and outstanding increased from 2013 to 2014.

2. Retained earnings, December 31, 2014 $2,400,000

Retained earnings, December 31, 2013 2,175,000

Increase during 2014 $225,000

Sugarland had a profit less dividends of $225,000 during 2014, as indicated by the increase in

Retained earnings.

(5-10 min.) S 10-6

Journal

ACCOUNTS POST REF. Dr. Cr.

a. Cash (1,000 shares $35) 35,000

Common stock (1,000 shares $15) 15,000

Paid-in capital in excess of par--Common ($35,000 -

$15,000)

20,000

b. Cash 83,000

Preferred stock (2,000 shares $25) 50,000

Paid-in capital in excess of par--Preferred ($83,000 -

$50,000)

33,000


(10-15 min.) S 10-7

Journal


2014

Dec. 15 Retained earnings (or Dividends) [(.02 x $140,000 total par) + (80,000 shares $.70)]

58,800

Dividends payable 58,800

Declared a cash dividend.

2015

Jan. 4 Dividends payable 58,800

Cash 58,800

Paid the cash dividend.

(10-15 min.) S 10-8

1. Zepher, Inc. must declare $4,000 (1,000 shares x.05 x $80) each year before the common stockholders get any cash dividends.

2. Assume that the total dividend declared in 2014 is $22,000:

Total dividend $22,000 Less: 2014 preferred dividend (4,000) Common dividend $18,000

3. Zepher, Inc.’s Preferred stock is assumed to be cumulative because it is not specifically labeled as noncumulative.

4. Assume that the total dividend declared in 2017 is $19,000:

Total dividend $19,000 Less: 2015 preferred dividend (4,000) 2016 preferred dividend (4,000) 2017 preferred dividend (4,000) Total preferred dividend (12,000) Common dividend $7,000


(10-15 min.) S 10-9

1. Journal

DATE ACCOUNTS

POST

REF. Dr. Cr.

May 31 Retained earnings (or Dividends) (110,000 shares .10 $8 market value)

88,000

Common stock

(110,000 shares .10 $2 par) 22,000

Paid-in capital in excess of par— Common

($88,000 - $22,000) 66,000 2. There is no effect on Oceanview Realty’s total assets. There is no effect on Oceanview Realty’s total stockholders’ equity. (10-15 min.) S 10-10 1. Stock dividends

2. Cash dividends

3. Both cash dividends and stock dividends

4. Stock dividends


(5–10 min.) S 10-11 1. Stockholders’ equity Paid-in capital: Common stock, $4.00 par, 1,000,000 shares authorized, 240,000 shares issued and outstanding $960,000 Paid-in capital in excess of par, common 225,000 Total paid-in capital 1,185,000Retained earnings 298,000Total stockholders’ equity 1,483,000 Computations: Par value: $8 x ½ = $4.00 Shares authorized: 500,000 x 2 = 1,000,000 Shares issued and outstanding: 120,000 x 2 = 240,000 2. No account balances changed after the stock split. All account balances were unchanged. (10-15 min.) S 10-12 Req 1

Journal


a. Treasury stock, common (2,500 shares $5) 12,500

Cash 12,500

b. Cash (1,000 shares $11) 11,000

Treasury stock, common (1,000 shares $5) 5,000

Paid-in capital from treasury stock ($11,000 -$5,000)

6,000


Req 2. Treasury stock is a contra-stockholders’ equity account. Liquidation World, Inc. should subtract the $7,500 balance in Treasury stock from the rest of the stockholders’ equity accounts to arrive at total stockholders’ equity on the balance sheet. (5-10 min.) S 10-13


Paid-In capital:

Common stock, $7 par, 250 shares issued and

outstanding $1,750,000


Total paid-in capital $1,922,000


Total stockholders’ equity $2,062,000

(10-15 min.) S 10-14 1.

Journal


Retained earnings (or Dividends)

40,000

Dividends payable

40,000

Declared a cash dividend.

Dividends payable

40,000

Cash

40,000

Paid the cash dividend.

2. The issuance of Common stock brought in $110,000 ($20,000 + $90,000) of cash during

2014. 3. The cost of the treasury stock purchased during 2014 was $18,000. The cost of the

treasury stock sold during 2014 was $9,000. The treasury stock was sold in 2014 for $19,000 ($10,000 + $9,000).


Exercises

(10-15 min.) E 10-32B

Req 1

Journal


2014

Oct 6 Cash 9,000

Common stock (300 shares $6) 1,800


($9,000 - $1,800) 7,200

Issued common stock.

12 Cash 26,000

Preferred stock 26,000

Issued preferred stock.

14 Land 18,000


Paid-in capital in excess of par--

Common($18,000 - $9,600) 8,400

Issued common stock for land.


Req 2

Stockholders’ Equity

Paid-in capital: Preferred stock, $3, no-par, 900,000 shares authorized, 500 shares issued and

outstanding $26,000 Common stock, $6 par, 1,400,000 shares authorized, 1,900 shares issued and

outstanding 11,400


Total paid-in capital $53,000

Retained earnings 32,000Total stockholders’ equity $85,000

Computations:

Common stock: $1,800 + $9,600 = $11,400

Paid-in capital in excess of par: $7,200 + $8,400 = $15,600


(10-15 min.) E 10-33B

Req 1

Journal


a. Cash (12,000 shares $18) 216,000

Common stock 216,000

Issued no-par common stock.

b. Cash (12,000 shares $18) 216,000


Paid-in capital in excess of stated value--

Common ($216,000 - $120,000)

96,000

Issued no-par common stock with $10 stated value.

Req 2

Both types of stock issuance result in the same amount of paid-in capital, $216,000.

(10-15 min.) E 10-34B

Total paid-in capital:

Preferred stock

Issued for cash (3,500 shares $50) $175,000

Common stock

Issued for cash (9,000 shares $6) 54,000

Issued for patent 55,000



(10-15 min.) E 10-35B

Assume that the total dividend declared in 2014 is $18,600:

Total dividend $18,600

Less: 2014 preferred dividend (25,000 shares x .08 x $12 = $24,000, but dividends total $18,600 only)

(18,600)

Common dividend $0

Assume that the total dividend declared in 2015 is $42,800: Total dividend $42,800 Less: 2014 preferred dividend ($24,000 - $18,600) (5,400) 2015 preferred dividend (25,000 shares x .08 x $12) (24,000) Total preferred dividend (29,400)Common dividend $13,400

(10-15 min.) E 10-36B

Assume that the total dividend declared in 2015 is $175,000:

Total dividend $175,000

Less: 2014 preferred dividend (65,000 shares x $.75) (48,750)

2015 preferred dividend (65,000 shares x $.75) (48,750)

Total preferred dividend (97,500)

Common dividend $77,500


(10-15 min.) E 10-37B

Req 1

Journal


Aug 31 Retained earnings (or Dividends) (25,000 shares

.15 $21 market value)

78,750

Common stock (25,000 shares .15 $10 par)

37,500

Paid-in capital in excess of par—

Common ($78,750 - $37,500) 41,250

Declared and distributed a stock dividend.

Req 2


Paid-in capital:

Common stock, $10 par, 900,000 shares authorized, 28,750 shares issued and outstanding $ 287,500




Total stockholders’ equity $585,000 Computations: Common stock: $250,000 +$37,500= $287,500 Paid-in capital in excess of par: $160,000 +41,250 = $201,250 Retained earnings: $175,000 - $78,750 = $96,250


(10-15 min.) E 10-38B Req 1

Journal


Retained earnings (or Dividends) (71,000 shares .15 $9 market value) 95,850

Common stock (71,000 shares .15 $5 par) 53,250

Paid-in capital in excess of par--Common ($95,850 - $53,250) 42,600

Declared and distributed a stock dividend. Req 2

Journal


Retained earnings (or Dividends) [(71,000 shares + 10,650 shares) $.40]

32,660

Dividends payable 32,660 Declared a cash dividend.

Dividends payable 32,660 Cash 32,660 Paid the cash dividend.


(20-25 min.) E 10-39B Req 1

No entry is needed to record the stock split because the split affects no account balances.

Req 2 Stockholders’ equity Paid-in capital:

Common stock, $0.50 par, 3,200,000 shares authorized, 240,000 shares issued and outstanding $120,000

Paid-in capital in excess of par--Common 48,000 Total paid-in capital $168,000Retained earnings 214,000Total stockholders’ equity $382,000 Computations: Par value: $2 x 1/4= $0.50 Shares authorized: 800,000 x 4 =3,200,000 Shares issued and outstanding: 60,000 x 4 = 240,000 (20-25 min.) E 10-40B

a. Increase stockholders’ equity by $1,276,000 (58,000 shares $22).

b. Decrease stockholders’ equity by $6,600 (1,100 shares $6).

c. No effect.

d. Increase stockholders’ equity by $2,100 (300 shares $7).

Some students may argue that the increase is $900 [300 shares ($7.00 – $4.00)], but that is incorrect. To see this, examine the entry to record sale of the treasury stock:

Journal DATE


Cash (300 shares $7) 2,100 Treasury stock (300 shares $4) 1,200 Paid-in capital from treasury stock ($2,100 - $1,200) 900 See that the two credits to the stockholders’ equity accounts (Treasury stock $1,200 and Paid-in capital from treasury stock $900) total $2,100. e. No effect.


(20-25 min.) E 10-41B

Journal


Mar 4 Cash (20,000 shares $10) 200,000

Common stock 200,000

Issued no-par Common stock.

May 22 Treasury stock (1,500 shares $6) 9,000

Cash 9,000

Purchased treasury stock.

Sep 22 Cash (600 shares $9) 5,400

Treasury Stock (600 shares $6) 3,600

Paid-in capital from treasury stock

($5,400- $3,600)

1,800

Sold treasury stock.

(20-25 min.) E 10-42B Req 1

Journal


Dec. 10 Treasury stock, Common (2,000 shares $13)

26,000

Cash 26,000

Purchased treasury stock.


Req 2


Paid-in capital:

Common stock, $4 par, 500,000 shares authorized, 90,000 shares issued, 88,000 shares outstanding $360,000


Total paid-in capital 810,000


1,360,000

Less: Treasury stock, 2,000 shares at cost (26,000)

Total stockholders’ equity $1,334,000

(10-15 min.) E 10-43B

Stockholders’ Equity

Paid-in capital: Preferred stock, 7%, $12 par, 20,000 shares authorized, 10,000 shares

issued and outstanding $120,000 Common stock, no-par, $8 stated value, 50,000 shares authorized,

issued, and outstanding 400,000

Paid-in capital in excess of stated value--Common 65,000



Total stockholders’ equity $708,000


(20-25 min.) E 10-44B

Fernandes Corp. Statement of Stockholders’ Equity


Common

Stock

AdditionalPaid-in Capital

Retained Earnings

Treasury Stock Total

Balance, December 31, 2013 $840,000 $145,000 $670,000 $(63,800) $1,591,200Sale of treasury stock 3,000 14,500 17,500Issuance of Common stock 6,600 15,400 22,000Net income 203,000 203,000Cash dividends (40,000) (40,000)Balance, December 31, 2014 $846,600 $163,400 $833,000 $(49,300) $1,793,700 Computations: Sale of treasury stock:

Increase in additional paid-in capital: 500 shares x ($35 sale price - $29 cost) = $3,000 Decrease in treasury stock: 500 shares x $29 cost = $14,500

Issuance of Common stock: Increase in Common stock: 1,100 shares x $6 par = $6,600 Increase in additional paid-in capital: 1,100 shares x ($20 issue price - $6 par) = $15,400


(20-25 min.) E 10-45B Req1

Journal


2014

June Cash (120,000 shares $12) 1,440,000



($1,440,000 - $240,000) 1,200,000

Issued stock.

Oct Retained earnings (or Dividends) (3,120,000 shares .05 $14 market value)

2,184,000

Common stock (3,120,000 shares .05 $2

par) 312,000

Paid-in capital in excess of par—Common

($2,184,000 - $312,000) 1,872,000

Declared and distributed a stock dividend.

Computations: Shares issued and outstanding: 3,000,000 + 120,000 = 3,120,000

Req 2

Global Communications, Inc. Statement of Stockholders’ Equity


Common

stock

Paid-in capital in

excess of par

Retained earnings Total

Balance, December 31, 2013 $6,000,000 9,700,000 $8,000,000 $23,700,000Issuance of stock 240,000 1,200,000 1,440,000Stock dividend 312,000 1,872,000 (2,184,000) —Balance, December 31, 2014 $6,552,000 $12,772,000 $5,816,000 $25,140,000


(20-25 min.) E 10-46B Req 1 Rate of return on stockholders’ equity = Net income

Average stockholders’ equity

=

$251,875 ($1,750,000 + $1,500,000)/2

= $251,875

$1,625,000

= 15.50% (rounded)

Req 2

Hansen Industrial Supply, Inc.’s return of equity of 15.50% indicates that Hansen Industrial Supply, Inc. performed well in 2014.


Problems

(10-15 min.) P 10-55B

Req. 1

6% is the annual dividend rate on the Preferred stock. It means that the annual dividend on the Preferred stock is $0.48 (6% x $8 par) per share.

Mackay, Inc. would expect to pay annual dividends on 1,500 shares of $720 ($8 par .06 1,500 shares)

Req. 2

Mackay, Inc. issued the Common stock during 2013 at a price of $3.75 per share. [($12,000 Common stock + $33,000 Paid-in capital in excess of par) /12,000 shares]

Req. 3

No, the first-year operations were not profitable, as shown by the ($4,000) deficit in Retained earnings.

Req. 4

Journal


a. Cash 40,000

Preferred stock (5,000 shares $8) 40,000

b. Cash (2,000 shares $7) 14,000



($14,000 - $2,000) 12,000


Req 5

Paid-in capital:

Preferred stock, 6%, $8 par, 70,000 shares authorized, 5,000 shares issued and outstanding $ 40,000

Common stock, $1 par, 140,000 shares authorized, 14,000 shares issued and outstanding 14,000




Total stockholders’ equity $170,000

Computations:

Common stock: $12,000 +$2,000 = $14,000

Paid-in capital in excess of par: $33,000 +12,000 = $45,000

Retained earnings: ($4,000) + $75,000 = $71,000

(20-25 min.) P 10-56B

Req 1

Davenport, Inc. has cumulative Preferred stock and Common stock outstanding.

Req 2

Journal


Millions

Cash 50

Preferred stock 50

Cash ($320 + $82) 402

Common stock 320

Paid-in capital in excess of par--Common 82


Req 3

($ Millions)

Assume that the total dividend declared in 2015 is $31:

Total dividend $31Less: 2013 preferred dividend (.08 x $50) (4) 2014 preferred dividend (.08 x $50) (4)

2015 preferred dividend (.08 x $50) (4)

Total preferred dividend (12)

Common dividend $ 19

Journal


Millions

Retained earnings (or Dividends) 31 Dividends Payable, Preferred 12 Dividends Payable, Common 19

(15-20 min.) P 10-57B

Req 1a

Year

Total

Dividend

Preferred

Dividend

Common

Dividend

2012 $22,000 $22,000 $0

2013 $95,000 $40,000 $55,000

2014 $225,000 $40,000 $185,000

Computations:

Preferred dividends per year: 8,000 shares x $5.00 = $40,000


Req 1b

Year Total Dividend

Preferred Dividend

Common Dividend

2012 $22,000 $22,000 $0

2013 $95,000 2012: $18,000 ($40,000 - $22,000) + 2013: $40,000 = Total: $58,000 $37,000

2014 $225,000 $40,000 $185,000 Computations: Preferred dividends per year: 8,000 shares x $5.00 = $40,000

Req 2

Journal


2014

Dec. 28 Retained earnings (or Dividends) 225,000 Dividend Payable, Preferred 40,000 Dividends Payable, Common 185,000 Declared a cash dividend.

2015 Jan. 17 Dividends Payable, Preferred 40,000 Dividends Payable, Common 185,000 Cash 225,000 Paid the cash dividend.


(20-25 min.) P 10-58B

Journal


2014

Jan. 6 Retained earnings (Dividends) 46,650

Dividends Payable, Preferred (9,000

shares $4.25)

38,250

Dividends Payable, Common (14,000

shares $.60)

8,400 Declared a cash dividend.

Jan. 20 Dividends Payable, Preferred 38,250 Dividends Payable, Common 8,400 Cash 46,650 Paid the cash dividend. Mar. 21 No entry required.

Apr. 18 Retained earnings (or Dividends) (28,000 shares .15 $32 market value)

134,400

Common stock (28,000 shares .15 $5 par)

21,000

Paid-in capital in excess of par--

Common ($134,400 - $21,000)

113,400 Declared and distributed a stock dividend. June 18 Treasury Stock, Common (1,400 shares $33) 46,200 Cash 46,200 Purchased treasury stock. Dec. 22 Cash (600 shares $38) 22,800

Treasury Stock, Common (600 shares $33)

19,800

Paid-in Capital from Treasury Stock

($22,800 - $19,800)

3,000 Sold treasury stock.

Computations: Common stock outstanding after split: 14,000 shares x 2 = 28,000 shares


(20-25 min.) P 10-59B Req 1

Journal


2014

Feb. 15 Treasury Stock (5,000 shares $6) 30,000

Cash 30,000

Mar. 8 Cash (1,000 shares $13) 13,000

Treasury Stock (1,000 shares $6) 6,000

Paid-in Capital from Treasury Stock ($13,000

- $6,000) 7,000

Sep. 28 Retained earnings (or Dividends) (116,000 shares .05 $7 market value)

40,600

Common stock (116,000 shares .05 $2 par) 11,600

Paid-in capital in excess of par--Common ($40,600 - $11,600)

29,000

Req 2

Stockholders’ Equity at December 31, 2014 Paid-in capital: Common stock, $2 par, 650,000 shares authorized, 125,800 shares

issued, 121,800 shares outstanding $251,600 Paid-in capital in excess of par--Common 339,000 Paid-in capital from treasury stock 7,000 Total paid-in capital 597,600Retained earnings 173,400 771,000Less: Treasury stock, 4,000 shares at cost (24,000)Total stockholders’ equity $747,000

Computations:

Common stock: 120,000 + 5,800 = 125,800 issued – 4,000 treasury shares = 121,800 outstanding

Paid-in capital in excess of par: $310,000 + $29,000 = $339,000

Retained earnings: $140,000 – $40,600 + $74,000 = $173,400

Treasury stock: $30,000 - $6,000 = $24,000


(10-15 min.) P 10-60B Req 1

Par value of Common stock: $16,000

= $3.20 per share 5,000 shares

newly issued Req 2 Price per share of stock issuance:

($16,000 + $56,000) = $14.40 per share

5,000 shares newly issued Req 3 Cost of treasury stock sold: $12,000 Selling price of treasury stock sold: $118,000 ($6,000 + $12,000) Increase in total stockholders’ equity: $18,000 Req 4 The stock dividend had no effect on total stockholders’ equity.


Chapter 11: The Statement of Cash Flows

Short Exercises

(5-10 min.) S 11-2

1. The “check figure” is change in cash, which can be found on a comparative balance sheet showing beginning and ending cash balances for the period.

2. Operating activities, investing activities, and financing activities are the categories of cash flows in order of importance.

3. Net income is the first dollar amount reported using the indirect method.

666 Solutions Manual Copyright © 2015 Pearson Education, Inc.

(5-10 min.) S 11-3

TO: Managers of Icemountain, Inc. FROM: Student Name SUBJECT: Purposes of Statement of Cash Flows

Although net income growth has been strong over the past 10 years, the company is now facing

bankruptcy because too little attention has been paid to cash flows over the years. The following

is a brief explanation of the purposes of the statement of cash flows:

1. By looking at cash receipts and cash payments from the past, it should be easier to forecast

what the cash flows will be in the future.

2. The statement of cash flows reveals whether the company is experiencing a positive or

negative cash flow from operations. This can expose problems with present management

operating decisions, i.e. collection policies. The statement of cash flows also reveals whether

the company is experiencing a positive or negative cash flow from investing activities. This

can expose other problems with management decisions, such as excessive acquisition of

long-term assets. Likewise, the statement of cash flows shows results from financing

decisions.

3. The statement of cash flows can help managers anticipate available funds for making

payments to lenders and for paying dividends to stockholders. If there is a positive cash flow

between operating activities and investing activities, there will be money available for paying

debts and dividends.


(10-15 min.) S 11-4

a. I+ i. O-

b. F+ j. O+

c. O+ k. NIF

d. F- l. F-

e. F+ m. NIF

f. O+ n. O+

g. O+ o. O+

h. F- p. O-

(10-15 min.) S 11-5

a. investing b. investing c. financing d. no effect

e. operating f. financing g. financing h. financing

i. operating j. investing k. operating


(10-15 min.) S 11-6

Net income $42,000

+ Depreciation expense 8,000

− Increase in Accounts Receivable (14,000)

− Decrease in Accounts Payable (6,000)

Net cash provided by operating activities $30,000

(10-15 min.) S 11-7

Trident Equipment Statement of Cash Flows

Year Ended April 30, 2014 Cash flows from operating activities: Net income $72,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $23,000 Increase in current assets (35,000) Decrease in current liabilities ( 4,000) (16,000) Net cash provided by operating activities 56,000 Cash flows from investing activities: Purchase of equipment (58,000) Proceeds from sale of land 63,000 Net cash provided by investing activities 5,000 Cash flows from financing activities: Proceeds from issuance of common stock 6,000 Purchase of treasury stock (7,000) Payment of notes payable (38,000) Payment of dividends (5,000) Net cash used for financing activities (44,000)Net increase in cash 17,000Cash balance April 30, 2013 11,000Cash balance April 30, 2014 28,000


(5-10 min.) S 11-8

Nemo’s Spas

Statement of Cash Flows


Cash flows from operating activities:

Collections from customers $572,000

Payments to suppliers and employees (417,000)


Cash flows from investing activities:

Acquisition of equipment (84,000)

Net cash used for investing activities (84,000)

Cash flows from financing activities:

Payment of dividends (57,000)

Net cash used for financing activities (57,000)

Net increase in cash 14,000

Cash balance, December 31, 2012 32,000

Cash balance, December 31, 2013 $ 46,000


(5-10 min.) S 11-9

Juarez Equipment, Inc. Statement of Cash Flows Year ended June 30, 2014

Cash flows from operating activities: Collections from customers $213,000 Payments to suppliers $ (92,000) Payments to employees (67,000) Net cash provided by operating activities 54,000 Cash flows from investing activities: Proceeds from sale of land 61,000 Purchase of equipment (38,000) Net cash provided by investing activities 23,000 Cash flows from financing activities: Proceeds from issuance of stock 21,000 Payment of dividends (16,000) Payment of notes payable (41,000) Net cash used for financing activities (36,000)Net increase in cash 41,000Cash balance, June 30, 2013 23,000Cash balance, June 30, 2014 $ 64,000


(5-10 min.) S 11-10

1.

Accounts Receivable

Bal. beg.

Sales revenue

$43

684

? Cash received from

customers

Bal. end $63

Cash received from customers = Beg. Bal. $43 + Sales revenue $684 – Bal. end. $63 = $664 2. Step a.

Inventory

Bal. beg. $84 334 Cost of goods sold

Purchases ?

Bal. end $77

Purchases of inventory + Beg. Bal. $84 – cost of goods sold $334 = Bal. end $77

Purchases of inventory = $327 (This is total purchases—some for cash and some on account).

Step b.

Accounts Payable

Payments to vendors ? $32 Bal. beg.

327 Purchases

$55 Bal. end

Bal. beg. $32 + purchases $327 – payments to vendors ? = Bal. end $55

Payments to vendors = $304


(10-15 min.) S 11-11

Plant Assets, Net

Beginning balance 180 Depreciation

expense

61

Acquisitions ?

Ending balance 226

Acquisitions of plant assets: $180– $61 + ? = $226

?= $107

(10-15 min.) S 11-12

1. Long-Term Notes Payable

Payment of notes payable ? Beginning balance 75

Ending balance 62

Payment of long term notes payable: $75 - ? = $62

?= $13

2.

Common Stock

Beginning balance 30

Sale of common stock ?

Ending balance 41

Sale of common stock: $30 + ? = $41

?= $11


3.

Retained Earnings

Dividends declared ? Beginning balance 255

Net Income 97

Ending balance 290

Dividends declared: $255 + $97 - ? = $290

? = $62

Since there is no Dividend Payable, dividends paid equals dividends declared.


Exercises

(10-15 min.) E 11-23B

Req 1


Net income $132,000

Adjustments to reconcile net income to

net cash provided by operating activities:

Depreciation expense $ 9,000

Decrease in accounts receivable 6,000

Increase in inventory (14,000)

Increase in accounts payable 11,000 12,000



(20-25 min.) E 11-24B

Req 1

Snyder Services, Inc. Statement of Cash Flows

Year Ended November 30, 2014 Cash flows from operating activities: Net income $ 93,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $19,000 Decrease in accounts receivable 15,000 Increase in inventory (14,000) Increase in accounts payable 9,000 Decrease in accrued liabilities (13,000) 16,000 Net cash provided by operating activities 109,000 Cash flows from investing activities: Acquisition of fixed assets (87,000) Proceeds from sale of land 19,000 Net cash used for investing activities (68,000) Cash flows from financing activities: Proceeds from issuance of common stock 50,000 Payment of long-term notes payable (15,000) Payment of dividends (16,000) Net cash provided by financing activities 19,000 Net increase in cash 60,000 Cash balance, November 30, 2013 11,000 Cash balance, November 30, 2014 $ 71,000

Noncash investing and financing transaction: Acquisition of fixed asset with note payable $15,000

Req 2

Free cash flow = Net cash flow from operations - Cash payment for investment in L/T assets = $109,000 - $87,000 = $22,000


Req 3

Snyder Services’ operations provided net cash flows of $109,000. The majority of the cash flow comes from operations, as it should in a successful company. Snyder Services used net negative cash flows of $68,000 for investing activities. However, this indicates that the company is investing its cash into the long term assets of the business. Snyder Services’ financing activities provided net cash flows of $19,000. The company raised additional capital by issuing common stock, which more than covered the payment of long-term debt and the return of some of the proceeds from operations to the stockholders in the form of dividends. Snyder Services also has Free cash flow of $22,000 which indicates it has cash available to pay dividends, pay off debt, or pursue other investment oportunities.

(10-15 min.) E 11-25B

Req 1

Cash Conversion Cycle = (Days-Sales-In-Inventory) + (Receivable Collection Period) –

(Accounts Payable Payment Period)

Days-Sales-In-Inventory =Average Inventory/ (Cost of Goods Sold/365 Days)

Receivable Collection Period = Average Accounts Receivables/(Credit Sales/365 Days)

Accounts Payable Payment Period = Average Accounts Payable/(Cost of Goods Sold/365 Days)

Days’ sales in inventory

= ($24,000+$38,000)/2

=$31,000

= 109.86 days $103,000/365 $282.19

A/R collection period

= ($55,000+$40,000)/2

=$47,500

= 63.05 days $275,000/365 $753.42

Accts. Payable payment period

= ($27,000+$36,000)/2

=$31,500

= 111.63 days $103,000/365 $282.19

Cash Conversion Cycle = 109.86 + 63.05 – 111.63 = 61.28 days

Req 2

Snyder Serices’ Cash conversion cycle has improved from 66.82 days to 61.28 days. This is a positive sign as it means that Snyder Services’ cash has been “tied up” for a shorter period of time in the current year.

(10-15 min.) E 11-26B


(10-15 min.) E 11-26B

1.

Retained Earnings

Dividends declared ? Beginning balance 29,000

Net income 62,000

Ending balance 80,000

Declarationt of cash dividends: $29,000 + $62,000 - ? = $80,000

?= $11,000

2.

Plant Assets, Net

Beginning balance 101,000 Depreciation 16,000

Acquisitions 42,000 Book value of assets sold ?

Ending balance 110,000

Book value of assets sold: $101,000 – 16,000 + $42,000 -? = $110,000

? = $17,000

Sale proceeds: Book value of assets sold + gain or – loss = $17,000 +$3,000 = $20,000


(10-15 min.) E 11-27B

Req 1


Receipts:

Collections from customers $90,000

Dividends received 8,000

Total cash receipts $ 98,000

Payments:

To suppliers (41,000)

To employees (46,000)

For income tax (9,000)

For interest (15,000)

Total cash payments (111,000)

Net cash used for operating activities $ (13,000)

Req 2

The negative cash flow from operating activities is a sign of a company that is in distress because a successful business needs to generate most of its cash flows from day to day operating activities.


(20-25 min.) E 11-28B

Snyder Services, Inc. Statement of Cash Flows

Year Ended November 30, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 290,000 Dividends received 11,000 Total cash receipts $ 301,000 Payments: To suppliers (110,000) To employees (63,000) For income tax (12,000) For interest (7,000) Total cash payments (192,000) Net cash provided by operating activities 109,000 Cash flows from investing activities: Acquisition of fixed assets (87,000) Proceeds from sale of land 19,000 Net cash used for investing activities (68,000) Cash flows from financing activities: Proceeds from issuance of common stock 50,000 Payment of long-term notes payable (15,000) Payments of dividends (16,000) Net cash provided by financing activities 19,000 Net increase in cash 60,000 Cash balance, November 30, 2013 11,000 Cash balance, November 30, 2014 $ 71,000


(10-15 min.) E 11-29B

1. Accounts Receivable

Bal. beg. Credit Sales

$26,000 147,000

? Cash received from customers

Bal. end $31,000 Cash received from customers = Beg. Bal. $26,000 + Credit Sales $147,000 – Bal. end. $31,000 = $142,000 2. Step a.

Inventory Bal. beg. $31,000 94,000 Cost of goods sold Purchases ? Bal. end $34,000 Purchases of inventory + Beg. Bal. $31,000 – cost of goods sold $94,000 = Bal. end $34,000 Purchases of inventory = $97,000 (this is total purchases, some for cash and some on account). Step b.

Accounts Payable Payments to vendors ? $ 4,000 Bal. beg. 97,000 Purchases

$9,000 Bal. end Bal. beg. $4,000 + purchases $97,000 – payments to vendors ? = Bal. end $9,000 Payments to vendors = $92,000


(20-25 min.) E 11-30B

(In millions) a. Collections from customers: Sales revenues $24,859 + Decrease in accounts receivable 179 = Collections from customers $25,038 b. Payments for inventory: Cost of goods sold $18,162 − Decrease in inventory (592) − Increase in accounts payable (183) = Payments for inventory $17,387

c. Payments for other operating expenses: Other operating expenses $ 4,883 + Decrease in accrued liabilities 91 = Payments for operating expenses $ 4,974

d. Acquisitions of property and equipment: Ending balance, Property and equipment, net $ 4,345 + Depreciation expense 288 − Beginning balance, Property and equipment, net (3,879) = Acquisitions of property and equipment $ 754

e. Long-Term borrowing: Ending balance, Long-term liabilities $ 500 − Beginning balance, Long-term liabilities (470) = Long-Term borrowing $ 30

f. Proceeds from issuance of common stock: Ending balance, Common stock $ 675 − Beginning balance, Common stock (615) = Proceeds from issuance of common stock $ 60

g. Payment of cash dividends: Retained earnings, beginning balance $ 4,683 + Net income 994 − Retained earnings, ending balance (4,198) = Payment of cash dividends $ 1,479


Problems

(20-25 min.) P 11-37B

Req 1

Carlson Corporation Statement of Cash Flows

Year Ended December 31, 2014 Cash flows from operating activities: Net income $ 57,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 21,900 Loss on sale of equipment 10,500 Increase in accounts receivable (4,900) Decrease in inventory 3,200 Increase in accounts payable 1,600 Decrease in income tax payable (2,000) 30,300 Net cash provided by operating activities 87,600 Cash flows from investing activities: Acquisition of building (124,000) Proceeds from sale of equipment 53,000 Net cash used for investing activities (71,000) Cash flows from financing activities: Proceeds from issuance of common stock 36,900 Proceeds from issuance of long-term notes payable 34,600 Payment of dividends (18,300) Purchase of treasury stock (14,200) Net cash provided by financing activities 39,000 Net increase in cash 55,600 Cash balance, December 31, 2013 27,000Cash balance, December 31, 2014 $ 82,600

Noncash Investing and Financing Activities:

Retirement of bonds payable by issuing common stock $66,000


(20-25 min.) P 11-38B

Req 1 Marsing Company

Statement of Cash Flows Year Ended March 31, 2014

Cash flows from operating activities: Net income $ 76,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 18,300 Decrease in accounts receivable 7,200 Increase in inventories (1,700) Increase in accounts payable 3,400 Decrease in accrued liabilities (2,100) Increase in income tax payable 3,800 28,900 Net cash provided by operating activities 105,300 Cash flows from investing activities: Acquisition of equipment (29,400) Acquisition of building (99,200) Net cash used for investing activities (128,600) Cash flows from financing activities: Proceeds from issuance of common stock 15,000 Proceeds from issuance of long-term notes payable 60,000 Payment of dividends (42,000) Net cash provided by financing activities 33,000 Net increase in cash 9,700 Cash balance, March 31, 2013 5,600Cash balance, March 31, 2014 $ 15,300

Req. 2 Marsing Company’s operations provided net cash flow of $105,300. This amount exceeds net income, as it should due to the add-back of depreciation. In addition, the majority of the cash flow comes from operations, as it should in a successful company. Marsingr Co. used net negative cash flows of $128,600 for investing activities. However, this indicates that the company is investing its cash into the long-term assets of the business. CMarsing Company’s financing activities provided net cash flows of $33,000. The company raised additional capital by issuing common stock and long-term notes payable, which more than covered the return of some of the company’s earnings to the stockholders.


(20-25 min.) P 11-39B

Req 1

Kahl Medical Supplies Statement of Cash Flows

Year Ended December 31, 2014 Cash flows from operating activities: Net income $67,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 4,600 Decrease in accounts receivable 1,800 Increase in inventory (2,300) Decrease in accounts payable (5,500) Increase in accrued liabilities 2,600 1,200 Net cash provided by operating activities 69,000 Cash flows from investing activities: Acquisition of land (28,800) Acquisition of equipment (9,000) Net cash used for investing activities (37,800) Cash flows from financing activities: Proceeds from issuance of common stock 24,100 Payment of dividends (26,700) Payment of notes payable (28,000) Net cash used for financing activities (30,600)Net increase in cash 600 Cash balance, December 31, 2013 6,000Cash balance, December 31, 2014 $ 6,600 Calculations: Acquisition of equipment = increase in Equipment, net plus Depreciation Expense = $4,400 + $4,600 = $9,000 Payment of dividends = Net income – increase in retained earnings = $67,800 - $41,100 = $26,700 Req 2 Just looking at the balance sheet and the income statement does not give an accurate appraisal of the financial strength of a company. For example, the balance sheet reflects a modest increase in cash of only $600. This could cause some initial concern. However, looking at the statement of cash flows, one realizes that Kahl Medical Supplies had net cash provided by operating activities of $69,000. The modest increase in cash was due to the net cash provided by operating activities being used to invest in capital assets, reduce long-term debt, and pay dividends.


(20-25 min.) P 11-40B

Req 1

Inez, Inc. Statement of Cash Flows

Year Ended September 30, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 637,000 Interest received 7,600 Dividends received 4,800 Total cash receipts $ 649,400 Payments: To suppliers (381,900) To employees (87,400) For taxes (38,600) For interest (13,200) Total cash payments (521,100) Net cash provided by operating activities 128,300 Cash flows from investing activities: Acquisition of fixed assets (82,300) Proceeds from sale of fixed assets 17,800 Net cash used for investing activities (64,500) Cash flows from financing activities: Proceeds from issuance of common stock 55,000 Proceeds from issuance of notes payable 23,500 Payments of long-term notes payable (46,800) Payment of dividends (41,300) Net cash used for financing activities (9,600)Net increase in cash 54,200 Cash balance, September 30, 2013 26,700 Cash balance, September 30, 2014 $ 80,900


(20-25 min.) P 11-41B

Req 1

Kahl Medical Supplies Statement of Cash Flows

Year Ended December 31, 2014 Cash flows from operating activities: Receipts: Collections from customers $214,800 Interest received 8,300 Total cash receipts $ 223,100 Payments: To suppliers: (86,000) To employees (27,700) For interest (11,400) For income taxes (29,000) Total cash payments (154,100) Net cash provided by operating activities 69,000 Cash flows from investing activities: Acquisition of land (28,800) Acquisition of equipment (9,000) Net cash used for investing activities (37,800) Cash flows from financing activities: Proceeds from issuance of common stock 24,100 Payment of dividends (26,700) Payment of notes payable (28,000) Net cash used for financing activities (30,600)Net increase in cash 600 Cash balance, December 31, 2013 6,000Cash balance, December 31, 2014 $ 6,600 Calculations: Collections from customers = Sales Revenue + decrease in Accounts Receivable = $213,000 + $1,800 = $214,800 Payment to suppliers = Payment for inventory plus payment for other operating expenses = (Cost of goods sold plus increase in inventory plus decrease in Accounts Payable) + (Other Operating Expenses – increase in Accrued Liabilities) = ($70,500 + $2,300 + $5,500) + ($10,300 - $2,600) = ($78,300) + ($7,700) = $86,000 Acquisition of equipment = increase in Equipment, net plus Depreciation Expense = $4,400 + $4,600 = $9,000 Payment of dividends = Net income – increase in retained earnings = $67,800 - $41,100 = $26,700


Req 2

Just looking at the balance sheet and the income statement does not give an accurate appraisal of the financial strength of a company. For example, the balance sheet reflects a modest increase in cash of only $600. This could cause some initial concern. However, looking at the statement of cash flows, one realizes that Kahl Medical Supplies had net cash provided by operating activities of $69,000. The modest increase in cash was due to the net cash provided by operating activities being used to invest in capital assets, reduce long-term debt, and pay dividends.

(20-25 min.) P 11-42B

Nelson Industrial, Inc. Statement of Cash Flows

Year Ended December 31, 2014 Cash flows from operating activities: Receipts: Collections from customers $ 461,300 Interest received 8,200 Total cash receipts $ 469,500 Payments: To suppliers (304,800) To employees (62,300) For interest (21,400) For income taxes (7,600) Total cash payments (396,100) Net cash provided by operating activities 73,400 Cash flows from investing activities: Acquisition of equipment (21,800) Net cash used for investing activities (21,800) Cash flows from financing activities: Proceeds from issuance of common stock 58,500 Payment of dividends (10,700) Payment of notes payable (72,000) Net cash used for financing activities (24,200)Net increase in cash 27,400 Cash balance, December 31, 2013 63,800Cash balance, December 31, 2014 $ 91,200


Chapter 12: Financial Statement Analysis

Short Exercises

(5-10 min.) S 12-1

__E__ a. $12,000 insurance proceeds on a fully depreciated piece of equipment that was lost in a hurricane.

__C__ b. $800 gain on the sale of office furniture.

__C__ c. Income tax expense

__D__ d. $106,000 loss incurred as a result of closing the Coeur d’Alene, Idaho store location.

__C__ e. $2,300 loss incurred as a result of a company vehicle being involved in an accident. (Note – auto accidents are not

unusual or infrequent)


(10-15 min.) S 12-2

Increase (Decrease)

(Amounts in thousands) 2014 2013

2014 2013 2012 Amount Percentage Amount Percentage

1. Net sales $325 $263 $212 $62 23.6% $51 24.1%

Cost of sales 200 161 128

2. Gross profit $125 $102 $84 $23 22.5% 18 21.4%

(10-15 min.) S 12-3

2014 Amount Percentage

Assets Current assets: Cash $14,400 18.0% Accounts Receivable, net 5,600 7.0% Inventory 23,200 29.0% Prepaid expenses 2,400 3.0% Total current assets 45,600 57.0% Plant and Equipment, net 34,400 43.0% Total assets $80,000 100%


(10-15 min.) S 12-4

1. c

2. e

3. g

4. a

5. h

6. d

7. b

8. f


(10-15 min.) S 12-5

a. 4.

b. 3.

c. 5.

d. 4.

e. 1.

f. 4.

g. 2.

h. 4.

i. 1.

j. 5.

k. 3.

l. 2.

m. 1.

n. 5.

o. 4.


(10-15 min.) S 12-6

1. Accounts receivable turnover = $189,000

= 12.60 times ($13,000 + $17,000) / 2

2. Inventory turnover = $72,270

= 9.42 times ($12,000 + $14,000) / 2

(10-15 min.) S 12-7

1. Current ratio = $14,000 + $17,000 + 9,000

= 1.60 $25,000

2. Quick ratio

= $14,000 + $17,000

= 1.24 $25,000 3. Cash conversion

cycle = 39 + 29- 26 = 42 days

Days-sales-in-

inventory = ($12,000 + $9,000) / 2 = 39days

$98,910/365

Receivable

collection period = ($13,000 + $17,000) / 2 = 29 days

$189,000/365

Accounts payable

payment period = ($6,000 + $8,000)/2 = 26 days

$98,910/365


(10-15 min.) S 12-8

1. Debt ratio = $322,500

= .56 or 56% $572,000

2. Interest coverage ratio = $227,600

= 12.17 times $18,700

3. Return on assets = $191,400

= .35 or 35% ($572,000 + $513,000) / 2

4. Dividend payout

= $24,600

= .13 or 13% $191,400

5. Return on equity = $191,400

= .85 or 85% ($249,500 + $198,500) / 2

(10-15 min.) S 12-9

1. Earnings per share = $191,400

= $3.48 (50,000+ 60,000)/2

2. Price/earnings ratio = $34

= 9.77 $3.48


(10-15 min.) S 12-10

Dividend yield = $6

= .25 $24


Exercises

(15-20 min.) E 12-21B

2014 2013 2012 Total current assets

$336,250 $328,500 $315,000

Total current liabilities

232,705 213,450 185,000

Net working capital

$103,545 $115,050 $130,000

Amount Percentage Amount Percentage ($11,505) (10.0%) ($14,950) (11.5%)

Although the percentage decrease in working capital is less from 2013 to 2014 than it was from 2012 to 2013, the trend is unfavorable given the decreases in both years.


(15-20 min.) E 12-22B

Horton, Inc. Income Statement

Years Ended December 31, 2014 and 2013 Increase / (Decrease)

2014 2013 Amount Percentage

Revenue $595,000 $505,000 $90,000 17.8%

Expenses:

Cost of goods sold 270,000 227,000 43,000 18.9%

Selling and general expenses 120,000 110,000 10,000 9.1%

Interest expense 48,000 41,000 7,000 17.1%

Income tax expense 30,000 35,000 (5,000) (14.3%)

Total expenses 468,000 413,000 55,000 13.3%

Net income $ 127,000 $ 92,000 35,000 38.0%

Req 1

Net income increased by a higher percentage than total revenues because revenues increased at a higher rate (17.8%) than did total

expenses (13.3%).


(15-20 min.) E 12-23B

Year 5 Year 4 Year 3 Year 2 Year 1 Net sales 118% 110% 104% 102% 100% Net income 110% 105% 102% 101% 100%

Net sales grew faster than net income during the period.


(15-20 min.) E 12-24B

Natalie’s Nursing Home

Balance Sheet December 31, 2014

Amount Percentage Assets

Total current assets $126,000 21.3% Long-term investments 90,000 15.2% Property, plant and equipment, net 376,000 63.5% Total assets $592,000 100.0%

Liabilities Total current liabilities $ 120,000 20.3% Long-term debt 202,000 34.1% Total liabilities $322,000 54.4%

Stockholders’ Equity Total stockholders’ equity 270,000 45.6% Total liabilities and stockholders’ equity $592,000 100.0%


(15-20 min.) E 12-25B

Horton, Inc. Common-Size Income Statement

Years Ended December 31, 2014 and 2013 2014 2013 Total revenues 100.0% 100.0% Expenses: Cost of goods sold 45.4% 45.0% Selling and general expenses 20.2% 21.8% Interest expense 8.1% 8.1% Income tax expense 5.0% 6.9% Total expenses 78.7% 81.8% Net income 21.3% 18.2%


(15-20 min.) E 12-26B

a. Current ratio = $195,000

= 1.65 $118,000

b. Quick ratio

= $28,000 + $20,000 + $64,000

= .95 $118,000 c. Cash conversion

cycle = 82 + 50 - 64 = 68 days

Days-sales-in-

inventory = ($77,000 + $55,000) / 2 = 82 days

$293,000/365

Receivable

collection period = ($64,000 + $70,000) / 2 = 50 days

$488,000/365

Accounts payable

payment period = ($54,000 + $48,000)/2 = 64 days

$293,000/365

d. Accounts receivable

= $488,000

= 7.28 times turnover ($64,000 + $70,000) / 2

e. Inventory turnover = $293,000

= 4.44 times ($77,000 + $55,000) / 2


f. Gross profit %

= ($488,000 - 296,000)

= 39.3% $488,000 g. Net income %

= $61,000

= 12.5% $488,000


(15-20 min.) E 12-27B

a. Current ratio:

2014: $40,000 + $36,000 + $150,000 + $180,000 + $5,000

= 2.69 $153,000

2013: $25,000 + $22,000 + $136,000 + $192,000 + $4,000

= 2.35 $161,000

b. Quick ratio:

2014: $40,000 + $36,000 + $150,000

= 1.48 $153,000

2013: $25,000 + $22,000 + $136,000

= 1.14 $161,000

c. Debt ratio:

2014: $283,000

= 0.49

2013: $326,000

= 0.58 $572,000 $560,000

Computations: Total liabilities, 2014: $153,000 + $130,000 = $283,000 Total liabilities, 2013: $161,000 + $165,000 = $326,000 d. Interest coverage ratio:

2014: $175,000

= 10.94 times 2013: $158,000

= 8.10 times $16,000 $19,500


Summary: The company’s ability to pay its current liabilities, long-term debt, and interest expense improved during 2014, as shown

by the increase in the current ratio, quick ratio and interest coverage ratio ratio, as well as the decrease in the debt ratio.


(15-20 min.) E 12-28B

a. Accounts receivable turnover:

2014: $215,000

= 10.24

2013:$200,000

= 9.76 ($20,000 + $22,000)/2 ($22,000 + $19,000)/2

b. Inventory turnover:

2014: $118,000

= 18.15

2013:$110,000

= 15.71 ($7,000 + $6,000)/2 ($6,000 + $8,000)/2

c. Fixed asset turnover

2014: $215,000

= 1.43

2013:$200,000

= 1.36 ($152,000 + $148,000)/2 ($148,000 + $146,000)/2

d. Total asset turnover

2014: $215,000

= 1.18

2013:$200,000

= 1.13 ($183,000 + $180,000)/2 ($180,000 + $175,000)/2

e. Return on total assets:

2014: $33,500

= 18.46%

2013:$32,000

= 18.03% ($183,000 + $180,000)/2 ($180,000 + $175,000)/2

Req 2.

The company’s performance improved during 2014 as shown by increases in all of the ratios.


(15-20 min.) E 12-29B

2014 2013 a. Earnings per share: $110,000

= $1.07 $120,000

= $1.22 (105,000 + 100,000)/2 (100,000 + 97,000)/2 b. Dividends per share: $45,000

= $.44 $51,000

= $.52 (105,000 + 100,000)/2 (100,000 + 97,000)/2 c. Dividend payout: $45,000

= 40.91%$51,000

= 42.50% $110,000 $120,000 d. Return on equity: $110,000

= 17.70%$120,000

= 20.29% ($640,000 + $603,000)/2 ($603,000 + $580,000)/2 Sharp Systems Incorporated stock’s attractiveness has decreased during the year as shown by the decrease in all of the ratios.


(15-20 min.) E 12-30B

Order of computation: MillionsGiven Current assets $30,000

4 Property, plant, and equipment. $50,000 Given Less: Accumulated depreciation 5,000 45,000

3 Total assets $75,000 1 Current liabilities $ 20,000 2 Long-term liabilities 25,000 6 Stockholders’ equity 30,000 5 Total liabilities and stockholders’ equity $75,000

Computations: 1. Current liabilities: $30,000 ÷ 1.5 = $20,000 2. Long-term liabilities: $45,000 - $20,000= $25,000 3. Total assets: $45,000 ÷ .60 = $75,000 4. Property, plant, and equipment, net: $75,000 - $30,000 = $45,000 Property, plant, and equipment: $45,000 + $5,000 = $50,000 5. Total liabilities and stockholders’ equity = total assets of $75,000 6. Stockholders’ equity: $75,000 - $20,000 - $25,000 = $30,000


Problems (20-25 min.) P 12-37B

Req. 1

Regal Clothing Emporium Trend Percentages

2014 2013 2012 2009 Net sales 132% 117% 112% 100% Net income 167% 157% 108% 100% Ending total assets 130% 124% 110% 100%

Req 2 (Dollar amounts in thousands)

2014 2013 2012 Return on assets =

$82 = 12.9%

$77 = 13.2%

$53 = 10.1% ($650 + $620)/2 ($620 + $550)/2 ($550 + $500)/2

Req. 3 Based on the return on assets, in 2012, Regal underperformed its main competitor. However, in 2013 and in 2014 Regal outperformed

its main competitor.


(20-25 min.) P 12-38B

Req 1

Johnson Auto Sales Common-Size Income Statement Compared to Industry Average


Johnson Industry Average

Net sales 100.0% 100.0% Cost of goods sold 60.1% 63.2% Gross profit 39.9% 36.8% Operating expenses 31.5% 27.5% Operating income 8.4% 9.3% Other expenses 0 .6% 0.5% Net income 7.8% 8.8%

Johnson Auto Sales

Common-Size Balance Sheet Compared to Industry Average December 31, 2014

Johnson

Industry Average

Current assets 70.7% 71.2% Fixed assets, net 23.6% 24.3% Intangible assets, net 0.6% 0.7% Other assets 5.1% 3.8% Total assets 100.0% 100.0% Current liabilities 49.3% 48.4% Long-term liabilities 18.7% 16.1% Stockholders’ equity 32.0% 35.5% Total liabilities and stockholders’ equity 100.0% 100.0%


Req. 2 Johnson Auto Sale’s common-size income statement shows that its ratio of gross profit to net sales is better than the industry average. However, the company’s ratio of operating income to net sales and ratio of net income to net sales are worse than the industry averages. Overall, Johnson’s profit performance is worse than average for the industry. Req. 3 Johnson’s common-size balance sheet shows that its ratio of current assets to total assets is comparable to the industry average. Johnson’s ratio of stockholders’ equity to total assets is lower than the industry average. This indicates that Johnson’s Auto Sales finances more of its assets with debt than others in the industry which might make it harder to obtain additional financing if necessary.


(20-25 min.) P 12-39B

Req 1

Current ratio $17,000 + $22,000 + $103,000 + $119,000 +$10,000

= 1.43 $45,000 + $105,000 + $40,000

Debt ratio $45,000 + $105,000 + $40,000 + $157,000 + $34,000

= 57.73% $660,000

Earnings per share $75,400

= $2.15 35,000

Req 2 a.

Current ratio $17,000 + $22,000 + $103,000 + $145,000 +$10,000

= 1.38 $45,000 + $131,000 + $40,000

Debt ratio $45,000 + $131,000 + $40,000 + $157,000 + $34,000

= 59.33% $686,000


= $2.15 35,000

b.

Current ratio $61,000 + $22,000 + $103,000 + $119,000 +$10,000

= 1.66 $45,000 + $105,000 + $40,000

Debt ratio $45,000 + $105,000 + $40,000 + $157,000 + $34,000

= 54.12% $704,000


= $1.93 39,000

c.

Current ratio $92,000 + $22,000 + $103,000 + $119,000 +$10,000

= 1.82 $45,000 + $105,000 + $40,000


Debt ratio $45,000 + $105,000 + $40,000 + $232,000 + $34,000

= 62.04% $735,000


= $2.15 35,000

d.

Current ratio $35,000 + $22,000 + $85,000 + $119,000 +$10,000

= 1.43 $45,000 + $105,000 + $40,000

Debt ratio $45,000 + $105,000 + $40,000 + $157,000 + $34,000

= 57.73% $660,000


= $2.15 35,000

(20-25 min.) P 12-40B

2014 2013 a. Current ratio: $374

= 1.780 $363

= 1.570 $210 $231 b. Inventory $241

= 1.51 $231

= 1.34 turnover: ($165 + $154) / 2 ($154 + $191) / 2 c. Accounts $492

= 5.62 $449

= 4.70 Receivable ($86+ $89) / 2 ($89 + $102) / 2 turnover: d. Interest coverage $108

= 10.80 $80 5.0

0

ratio: $10 $16

e. Return on equity: $65 = 30.88%

$42 = 21.48%

($228 + $193) / 2 ($193 + $198) / 2


f. Earnings per share $65

= $5.91* $42

= $4.20* of common stock: 11 10 g. Price/earnings $48.72*

= 8.26 $33.28*

= 7.92 ratio: $5.90* $4.20* *Not in thousands

Req 2

Decisions: a. The company’s performance improved during 2014 as shown by increases in the current ratio, inventory turnover, accounts

receivables turnover and in the interest coverage ratio. b. The common stock’s attractiveness increased during 2014, as shown by the increase in the return on equity, the earnings per share

of common stock, and the price/earnings ratio. Req 3 This problem gives you practice in computing and evaluating several of the ratios used in financial statement analysis. By analyzing the two-year trends in the ratios, you can see whether the company’s ability to pay its debts, manage its assets, and earn a return for its investors has improved or deteriorated during this period. Improving ratio values generally indicate an attractive investment, and deteriorating ratio values usually signal an unattractive investment.


(20-25 min.) P 12-41B

Req 1 (Dollar Amounts and Stock Quantities in Thousands) Here to Stay, Inc. Dream Home, Corp. a. Quick ratio: $12 + $11 + $28

= .86 $13 + $12 + $25

= .77 $59 $65 b. Debt ratio: $75

= 38.07% $74

= 39.15% $197 $189 c. Interest coverage $83

= 6.38 $63

= 5.73 ratio: $13 $11 d. A/R turnover: 395

= 13.86 333

= 13.59 ($28 + $29) / 2 ($25 + $24) / 2 e. Inventory $155

= 2.74 $125

= 2.31 turnover: ($60 + $53) / 2 ($52 + $56) / 2 f. Total asset turnover: 395

= 2.20 333

= 1.94 ($197 + $162) / 2 ($189 + $155) / 2 g. Return on assets: 43

= 23.96% 49

= 28.49% ($197+ $162) / 2 ($189 + $155) / 2 h. Return on equity: 43

= 42.79% 49

= 42.06% ($122+ $79) / 2 ($115 + $118) / 2 i. Earnings per share: $43

= $14.33* $49

= $8.17* 3 6


j. Price/earnings $45* = 3.14

$35.00* = 4.28

ratio: $14.33* $8.17* *Not in thousands

Decision:

Here to Stay, Inc.’s common stock seems to fit the investment strategy better. Its price/earnings ratio is lower than that of Dream

Home Corp. and it appears to be in better shape financially. On most of the ratios, Here to Stay, Inc. outperformed Dream Home Corp.


(20-25 min.) P 12-42B Student answers will vary TO: Client FROM: Student Name SUBJECT: Investment Recommendation I recommend that you invest in Mutual Material, Inc. for the following reasons: 1. Mutual Materials, Inc.’ return on equity (ROE) is 4.5% higher than Anderson Supply, Co.’s. An investment in Mutual Materials,

Inc. stock should, therefore, produce a higher return than an investment in Anderson Supply, Co. stock.

2. Mutual Materials, Inc.’ ROE exceeds its return on assets by a wider margin than does Anderson Supply, Co.’s. This means that

Mutual Materials, Inc. is earning more with its borrowed funds than Anderson Supply, Co. is earning.

3. Mutual Materials, Inc. can cover its interest expense with operating income 9.3 times compared to 7.4 times for Anderson Supply,

Co..

4. Mutual Materials, Inc. collects receivables faster than Anderson Supply, Co. does. This suggests that cash flow is stronger at

Mutual Materials, Inc..

5. Mutual Materials, Inc.’s gross profit percentage is higher than Anderson Supply, Co.’s. This means they have more left over from

each dollar of sales after paying for cost of goods sold to put towards paying operating expenses and providing a profit to

investors.


6. Anderson Supply, Co. is better than Mutual Materials, Inc. on inventory turnover and net income as a percentage of sales. These

ratios provide insight about companies’ operations, but ROE and interest coverage are more “bottom-line” oriented. Further,

accounts receivable turnover gives an indication about cash flow. For these reasons, I place more importance on ROE, interest

coverage, and accounts receivable turnover, and Mutual Materials, Inc. outstrips Anderson Supply, Co. on these measures.

Documents

Chapter 1: Business, Accounting, and You Short Exerciseslessons.pennfoster.com › pdf › SP1107.pdf · 2017-11-30 · (5-10 min.) S 1-5 Assets = Liabilities + Stockholder’s Equity